Making Basel III Work for Emerging Markets and Developing Economies

A sound financial regulatory framework is critical for minimizing the risk imposed by financial system fra­gility. In the world’s emerging markets and developing economies (EMDEs), such regulation is also essential to support economic development and poverty reduc­tion. Meanwhile, it is increasingly recognized that global financial stability is a global public good: recent decades have seen the development of new inter­national financial regulatory standards, to serve as benchmarks for gauging regulation across countries, facilitate cooperation among financial supervisors from different countries, and create a level playing field for financial institutions wherever they operate. For the worldwide banking industry, the international regulatory standards promulgated by the Basel Com­mittee on Banking Supervision (BCBS) stand out for their wide-ranging scope and detail. Even though the latest Basel recommendations, adopted in late 2017 and known as Basel III, are, like their predecessors, calibrated primarily for advanced countries, many EMDEs are in the process of adopting and adapting them, and many others are considering it. They do so because they see it as in their long-term interest, but at the same time the new standards pose for them new risks and challenges. This report assesses the implica­tions of Basel III for EMDEs and provides recommen­dations for both international and local policymakers to make Basel III work for these economies.

The report considers three different channels through which Basel III can affect financial stability and devel­opment in EMDEs: (1) effects on the volume, compo­sition, and stability of capital flows arising from the implementation of Basel III in advanced economies; (2) effects on financial stability and a level playing field from the adoption of the Basel framework by the home countries of affiliates of foreign banks operating in EMDEs; and (3) effects on financial stability, broad access to financial services, and deepening of local financial systems from the implementation of Basel III by EMDEs themselves.