Basel II implementation in developing countries and effects on SME development.

This Issue Paper examines the implementation of Basel II in low-income countries (LICs). The aims are to assess the low-income countries’ views and concerns on Basel II, whether and how they intend to implement the new Basel Capital Accord, and the challenges they may face in doing so. The paper discusses in particular the possible implications of Basel II implementation for competitiveness of LIC banking sectors and financial inclusion. Drawing on a survey covering low-income countries especially from Africa, the paper finds that in addition to technical challenges that include the need to build long and reliable data base to run sophisticated risk assessment models, and to build supervisors’ capacity to assess, validate and monitor the use of such models, LICs face broader issues related to Basel II implementation, such as competitiveness of national and foreign banks, access to credit by SMEs, potential increased pro-cyclicality of bank lending and their macroeconomic impacts. The paper concludes that LIC regulators may not need just technical assistance but also more ‘political’ support for their negotiations on regulations with international banks to ensure that their regulatory regimes are consistent with national aims for both financial stability and sufficient credit, especially to SMEs

Pipes and Connections

This document describes the low-level Pipe and ConnectionManager objects of the Mesh- Router system. The overall MeshRouter framework provides a general scheme for interest- limited communications among a number of client processes. This generality is achieved by a carefully factorized, object-oriented software implementation. Within this framework, the Pipe and ConnectionManager (base) classes dened in this note specify the interfaces for i) ac- tual `bits on the wire' communications and ii) dynamic client insertions during overall system execution. Two specic implementations of the Pipe class are described in detail: a `Memo- ryPipe' linking objects instanced on a single processor and a more general 'rtisPipe' providing inter-processor communications built entirely from the standard RTI-s library used in current JSAF applications. Initialization procedures within the overall MeshRouter system are dis- cussed, with particular attention given to dynamic management of inter-processor connections. Prototype RTI-s router processes are discussed, and simple extensions of the standard system conguration data les are presented

The liberalization of capital outflows in CIBS. What opportunities for other developing countries?

This paper examines the implications of the liberalization of capital outflows in China, India, Brazil, and South Africa (CIBS) for other developing countries. It focuses on their prospects of attracting not only foreign direct investment (FDI), but also portfolio capital flows from CIBS. To inform the discussion, two steps are taken: first, in order to identify the type of capital flows that might come from CIBS, the paper briefly describes capital account liberalization measures undertaken by CIBS to date and future intended liberalization. Second, it maps geographic distribution of outward FDI and foreign portfolio investment in the recent past, which are taken as possible predictors of future flows. The paper shows that portfolio investment goes mainly to OECD countries and offshore financial centres, and only a small share to developing countries. But, within developing countries, CIBS’ neighbouring countries have shown a greater ability to attract this type of investment, compared with other developing countries

Implementation of Basel Rules in Brazil: what are the implications for development finance?

This paper is set to examine the developmental impact of international Codes and Standards (C&S) as they are applied to the banking system in Brazil. It is driven by the questions: to what extent has compliance with international C&S affected, or may affect in the future, credit to the SMEs and the poor? Through what mechanisms? What changes (institutional, other) have occurred as a result? The paper focuses on the implementation of the Basel rules – Basel I and II. It finds strong indications that, as a result of implementation of Basel I in Brazil, credit as a proportion of the country’s GDP declined gradually between 1994 (when Basel I was adopted) and early this century. The paper also argues that Basel I probably contributed to the decline in the number of banks in Brazil since 1994, and to banking concentration as well. Furthermore, the paper shows that although Basel I has affected credit in Brazil, there is no clear evidence that credit to the SMEs, to rural producers or to the urban poor was negatively affected, at least not in a major way. The paper suggests that a main reason for this outcome is that credit patterns during the period under Basel I have been influenced by directed credit policy, which in a number of cases were intended to protect the less favoured segments. In relation to Basel II, the paper shows that Brazil’s regulators are proposing a gradual approach for the full implementation of these new banking rules. The paper sees this approach as appropriate for a developing country like Brazil where banks need time, resources and capacity building to be able to adopt Basel II in its entirety. But it also argues that the proposed framework lacks any countervailing mechanisms or instruments to address three key potentially negative implications concerning the new Basel rules: possible further banking concentration, concentration of banks’ portfolios away from SMEs and towards big corporations, and accentuated bank credit pro-cyclicality

Will Japan increase aid and improve its allocation to help the poorer countries achieve the millennium development goals?

Developed countries have pledged to increase financial assistance to poor countries in order to help them achieve the Millennium Development Goals. A few donors such as the US and the UK have been increasing their financial assistance in the recent past, but this trend has yet to be generalised across the donor community. Japan is among the largest aid donors, but has as yet not followed the US and the UK in increasing her aid budget. This paper sets the task of examining the prospects of Japanese aid to increase significantly in the coming years, and its allocation to be re-directed towards the most aid needy countries. To this end, we turn to the past to investigate how Japanese aid policies have changed over time and also identify empirically the major determinants of aid allocation. Our study shows that whilst Japan’s aid has increased in the past, in response to the broadening of its aid policy to include humanitarian and development objectives, the empirical analysis on aid allocation shows that geo-economic interests have played a crucial role. Given the historical trend one can conclude that the same determinant factors may keep on playing vital roles in aid allocation decision-making at least for some years to come, even though there has been an increased call for more assistance to poor regions