Posible Impact of Basel II on Emerging Countries
Boletin, Vol. LII, July-September
Bank of Spain Occasional Paper No. 0606
36 Pages Posted: 29 Aug 2009
Date Written: 2006
The new Basel II Framework will be important for emerging countries as a big part of them has declared to be willing to introduce such Framework in a more or less near future and international banks that are operating in these economies will abide to the new Framework through its holding. Basel II will have considerable benefits for these countries: the improvement in the measurement and management of risk of their banks and banking surveillance. It is also probable that an improvement in the banking balance structure takes place as collaterals and entitlements may rise and at the same time the incentives towards indebtness in local currency and to a longer term may be higher as well.
Basel II will have some drawbacks as it has not been weighted up for these countries; another potential problem is the higher procyclality of banking credit. Additionally, the balances of the domestic banks and international banks that operate in emerging countries may be more and more different, with more risk in the domestic and less in the foreign. Foreign banks may also have to bare a higher capital cost to use the IRB approach in all the holding.
Finally, the impact on regulatory capital and financing cost of these countries will be highly dependant on what is the sovereign risk of each emerging economy and on the approach used within the fist pillar of Basel II (standard of IRB). According to our estimates, financing cost may even reduce in emerging countries that are not members of the OECD while it may rise slightly in the few emerging countries members of the OECD. All in all, Basel II should represent more benefits than costs for emerging countries although this is a global assessment and it will depend on the country at hand and on the Basel II approach used.
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