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 t...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, D.C.
2013
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| Online Access: | http://documents.worldbank.org/curated/en/2002/03/1743999/capital-accord-emerging-economies http://hdl.handle.net/10986/14827 |
| Summary: | 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. |
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