Finance: Research, Policy and Anecdotes

Basel III-Unintended Consequences for Emerging Markets

As previously mentioned I am co-chairing a task force on “Unintended Consequences of Basel III in Emerging Markets”, together with Liliana Rojas-Suarez from the Center for Global Development (CGD).  We have now finalized the first part of this project, producing a document that lists different unintended consequences drawing on the expertise of the very diverse task force, as well as analysis and data where available. Liliana and I have published the main findings in the form of blogs on the CGD web-site. In the following the punch lines of these five blogs, with respective links:

 

Designed to enhance financial stability, Basel III is having unintended consequences for financial deepening as evidenced in the reduction of cross-border lending from advanced economies to emerging and developing markets, which cannot be explained completely by other demand- and supply-side factors.

 

Higher capital requirements for trade finance might also reduce the availability of such funding in emerging and developing countries.

 

In addition, the process of implementation of Basel III in global banks might bring about several unanticipated, adverse consequences to financial stability in the countries that host subsidiaries from global banks, including the potential decreased role of global banks in local government bond markets.

 

The indications so far are that the impact will be less on the aggregate volume of credit but rather on the composition with certain segments, including infrastructure and SME finance facing higher costs.

 

While the immediate and direct effects of implementing Basel III regulatory reforms in emerging markets and developing economies are in these countries’ banking systems, there might also be effects beyond them on other segments of the financial system, including risk management and capital market development.