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Chart of the turnover of OTC interest rate derivatives

Basel III & Unintended Consequences for Emerging Markets and Developing Economies - Part 5: Effects on Capital Market Development and the Real Economy

While the immediate and direct effects of implementing Basel III regulatory reforms in emerging markets and development economies (EMDEs) are in these countries’ banking systems, there might also be effects beyond them on other segments of the financial system. In this blog post, I will focus on two specific areas of concern—risk management and capital market development, and spill-overs from banking structural reforms in advanced countries.

Construction workers laying a road

Basel III & Unintended Consequences for Emerging Markets and Developing Economies - Part 4: Challenges on Infrastructure and SME Lending

The adoption of Basel III by developing countries raises the question of what the impact of such regulatory reform will be on volume, cost, and composition of domestic credit in these economies and for the development of financial systems more generally. This is against the background of many emerging markets not yet having fully exploited the potential for financial development and inclusion in their economies.

Percentage of Foreign Bank Assets Among Total Bank Assets (Selected EMDEs)

Basel III & Unintended Consequences for Emerging Markets and Developing Economies - Part 3: An Unlevel Playing Field Between Domestic and Foreign Banks Might Increase Governments’ Funding Costs

Responding to the latest assessment of Mexico’s implementation of the Basel III recommendations, the Mexican authorities argued that regulations for countries hosting foreign banks’ subsidiaries and for the parent countries of the subsidiaries should be aligned “in order to prevent distortions due to the asymmetric treatment of similar risk exposures by home and host jurisdictions,” which could result in an unlevel playing field between foreign subsidiaries and domestic banks.

US Cross-Border Trade Finance to EMDEs by income categories (USD Billions)

Basel III & Unintended Consequences for Emerging Markets and Developing Economies - Part 2: Effects on Trade Finance

Just as Basel III, among other factors, played a role in the decline in the volume of cross-border lending from advanced economies to EMDEs, it created incentives for a shift in the composition of these flows. Banks’ exposures to certain business lines have been affected, including those that are crucial for development like trade finance and infrastructure finance (the latter will be the subject of a future blog).