A capital accord for emerging economies?

The Basel 1988 Capital Accord is arguably the most successful of all recent financial"standards."Although it was designed for internationally active banks in G10 countries, more than 100 countries claim to adhere to it, and many apply the Accord to all banks. Significant changes to this Accord are currently under discussion. The author reviews the current proposals (published in January 2001) from the standpoint of an emerging market. He then addresses how implementation in G10 countries will affect the cost of capital to emerging economies. The new proposals make considerable advances in linking risk and regulatory capital for internationally active banks, especially for their corporate loan book. But the corporate-calibrated internal ratings-based (IRB) approach leads to significant changes in capital requirements and spreads for banks that lend to emerging countries. The author proposes that for sovereign lending, banks should develop internal ratings according to an S&P or Moody's scale, and capital charges be levied at the corresponding weights given by the standardized approach. The author argues that the more detailed and specific the proposals are for G10 internationally active banks, the less relevant the proposals will be for non-G10 countries that wish to implement the new Accord for all banks. Indeed, many emerging countries will implement the'standardized'approach, in which case, given the limited universe of rated risks, little will change. Alternatively, emerging countries will attempt to implement an IRB approach, but with significant problems implementing and calibrating the parameters-or inappropriate use of G10 calibrations. At the same time, banks in emerging economies remain the most important vehicle for financial intermediation and the appropriate regulation of bank capital one of the most important issues for financial sectors. The author suggests that additional alternatives should be included or, failing that, the time may have come specifically for an Accord for emerging economies.Banking Law,Payment Systems&Infrastructure,Financial Crisis Management&Restructuring,Banks&Banking Reform,International Terrorism&Counterterrorism,Banks&Banking Reform,Banking Law,Financial Intermediation,Financial Crisis Management&Restructuring,International Terrorism&Counterterrorism

Basel II and developing countries : Sailing through the sea of standards

Despite recently announced delays, Basel II - the new standard for bank capital - is due to be completed this year for implementation in the 13 Basel Committee member countries by the end of 2006. Should the other 170 plus member countries of the World Bank also adopt Basel II? Basel II was not written with developing countries in mind, but that does not necessarily mean that there is nothing in it for developing countries or that it can be ignored. Basels I and II represent a wide Sea of Standards. This paper suggests five alternative island-standards and five navigational tools to help countries choose their preferred island within the sea. It is suggested that for some developing countries the standardized approach will yield little in terms of linking regulatory capital to risk, but that countries may need many years of work to adopt the more advanced internal rating-based approach. The paper then proposes a centralized rating-based approach as a transition measure. The paper also makes proposals regarding a set of largely unresolved cross-border issues.Payment Systems&Infrastructure,Banking Law,Financial Intermediation,Banks&Banking Reform,Settlement of Investment Disputes,Banks&Banking Reform,Banking Law,Financial Intermediation,Financial Crisis Management&Restructuring,Settlement of Investment Disputes

Sobre la reestructuración, regulación y competencia en el sector de servicios públicos: experiencia del Reino Unido y sus implicaciones para América Latina

(Disponible en idioma inglés únicamente) Hay dos similitudes entre los programas de privatización de servicios públicos en el RU y América Latina. La privatización ha consistido principalmente en la transferencia al sector privado de compañías propiedad del Estado con posición dominante en su sector respectivo, a menudo con poderes monopólicos legales. Además, el uso extendido de una normativa basada en precios máximos en vez de la rentabilidad. Se puede sostener que una diferencia es que el RU trató de crear una política de regulación flexible estableciendo un conjunto de reguladores individuales del sector con cierta medida de independencia del gobierno con considerables poderes discrecionales.

Implications of Basel II for Latin America

Despite delays, Basel II remains set to be finalized this year with implementation in Basel Committee countries by the end of 2006. How will this agreement between a set of G10+ countries affect emerging economies? Two implications are considered here for countries in Latin America. First, earlier papers have suggested that implementation in G10+ may affect the cost of capital and may introduce pro-cyclicality. The analysis presented indicates that these concerns may be exaggerated depending on the value of critical parameters. Second, Latin America may choose to implement the new agreement locally. Five country characteristics are detailed that might serve as a guide to govern whether and if so how Basel II should be implemented. Moreover, a simpler Centralized Rating Based (CRB) approach to enhance provisioning is proposed as an initial or transition step for the region. Finally, a number of largely unresolved, cross-border issues are discussed.

Basel II and Developing Countries: Sailing through the Sea of Standards

Despite recently announced delays, Basel II - the new standard for bank capital - is due to be completed this year for implementation in the 13 Basel Committee member countries by the end of 2006. Should the other 170 or so member countries of the World Bank also adopt Basel II? Basel II was not written with developing countries in mind, but that does not necessarily mean that there is nothing in it for developing countries or that it can be ignored. Basels I and II represent a wide "Sea of Standards", this paper suggests five alternative Island-standards and five navigational tools to help countries choose their preferred Island within the Sea. It is suggested that for some developing countries the Standardized Approach will yield little in terms of linking regulatory capital to risk but that countries may need many years of work to adopt the more advanced Internal Rating Based Approach. The paper then proposes a Centralized Rating Based (CRB) approach as a transition measure. The paper also makes proposals regarding a set of largely unresolved cross-border issues.

Prudential Responses to De Facto Dollarization

We develop a theoretical framework that encompasses four distinct motives for dollarization and discuss appropriate policy responses to help contain dollarization and its attendant risks. "Moral hazard" dollarization provides a clear case for prudential policy activism, including through the introduction of currency-specific prudential norms. However, prudential reform will have only a limited impact on dollarization when the main culprits are fear of floating and lack of monetary credibility. In such cases, a concerted and comprehensive reform agenda, including market oriented and institutional reforms, would be needed to shift the balance of risks in favor of the peso. While quantitative limits on dollarization could also be used to speed up dedollarization, risks could be high.

Capital Requirements for Latin American Banks in Relation to their Market Risks: The Relevance of the Basle 1996 Amendment to Latin America

Banks` market or `trading` risks have increased noticeably over the past years, largely as a result of the growth of liquid assets on banks` balance sheets and the increase in banks` off-balance sheet activities. Well-publicized bank failures and significant capital losses have focussed further attention on these developments. In January 1996, the Basle Committee recommended the imposition of capital charges related to banks` trading risks, and the European Community`s Capital Adequacy Directive (CAD) came into force on January 1st, adopting, in part, the Basle Amendment. The G10 countries are committed to full implementation of these recommendations by the end of 1997. This paper reviews the main features of the Basle Amendment, which allows banks a choice between a `standardized methodology` and the use of their own internal models, subject to the authorization of the relevant supervisor and a set of parameter values. The relevance of this regulation for Latin America is analysed in the light of the region`s characteristics. We suggest that these characteristics increase rather than diminish the importance of the implementation of market risk capital requirements in Latin America.