June 14, 2019

IMF published a working paper that provides practical guidance on how developing economies, including non-Basel Committee member countries, could incorporate international standards into their prudential framework. The paper discusses the priorities when moving from Basel I to Basel III and presents five guiding principles for the adaptation of international standards (such as Basel III) to the banking systems in non-member countries of the Basel Committee.

The paper builds on the extensive experience gained on technical assistance missions on banking supervision and regulation that the IMF provides every year to more than 70 countries as well as from the Financial Sector Assessment Program (FSAP), which has undertaken some 280 detailed assessments of banking supervision in over 160 jurisdictions since its inception in 1999. Considering the dominance of banks in the financial system of most developing economies, the paper focuses on banking regulatory and supervisory issues. The paper discusses how the Basel Core Principles for Effective Banking Supervision (BCPs) can be used to set appropriate priorities for improving banking sector oversight. The BCPs provide high-level principles that have proved to be useful when adapting and implementing international standards in many developing economies from the IMF membership. The paper also discusses the enhanced capital and liquidity prudential requirements, which have been developed post the global financial crisis. Finally, it discusses the priorities when moving from Basel I to Basel III.

The paper highlights that new international standards, post the global financial crisis, provide a good basis for strengthening the financial systems in developing economies. However, no one-size-fits-all strategy exists to implement the post-crisis banking regulatory standards in developing economies. A thoughtful implementation of the post-crisis regulatory standards, which takes into account the specific characteristics of each jurisdiction, enhances banking system resilience in developing economies without conflicting with market development needs. Differences in financial development, the risk profile of the banking sector, and supervisory capacity need to be considered when establishing the priorities and the best path forward. Adjustments to international standards may be necessary but should observe the following guiding principles presented in the paper—

  • Rigor: Although international standards may need to be adapted to better suit developing economies, changes should not lead to less rigorous prudential frameworks that lead to less resilient financial institutions or promote riskier behavior.
  • Context: Furthermore, the regulatory framework must take into account the features of the risk environment that could be more pronounced, such as market illiquidity, high volatility, and challenges to the enforcement of claims and the execution of collateral.
  • Scope: While the characteristics of their financial systems may favor simpler standards, authorities should not compromise on the scope of regulation and must take in to account the fundamental regulatory weaknesses identified during the financial crisis.
  • Evolution: In adapting the standards and phasing in their implementation, it must be kept in mind that as financial systems deepen and become more complex, the regulatory framework will also need to support convergence to international practices.
  • Effectiveness: While the full set of international standards may not always be applicable to less complex and smaller financial markets, the underlying preconditions and expectations of the BCPs should be met.

 

Related Link: Working Paper

 

Keywords: International, Banking, Developing Economies, Basel III, Basel Core Principles, Regulatory Reform, IMF

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