GLOBAL financial DEVELOPMENT REPORT 2013
option. Yet many are aiming to adopt more complex approaches (figure 2.5b), sometimes without justification in terms of the complexity of the institutions that are to be supervised or the types of transactions in which they are involved. Indeed, experience from World Bank country work indicates that in some small or lower-income countries, the full range of options proposed by the BCBS is not properly thought through, resulting in the adoption of overly complex regulations for the level of economic development and complexity of the financial system. The survey indicates that introducing Basel II already had substantial impacts in many countries (figure 2.6), with the implementation being more challenging for the developing economies than for developed economies. Developing-economy regulators offer a variety of reasons why they want to adopt Basel II, although adoption is not mandatory outside the member states of the BCBS. Specifically, some are concerned that Basel I is beginning to be perceived as an inferior standard by international investors and that developing-economy financial institutions and markets may be penalized by international market participants or that their domestic banks may eventually be denied access to foreign markets if they do not comply with the latest Basel standards. According to Financial Stability Institute (2004), the main driver among nonmember countries of the BCBS to move toward Basel II is the fact that foreign-controlled banks or local subsidiaries of foreign banks operating under Basel II expect regulators in low-income countries to adopt the framework as well. Whether or not these concerns are justified, they have accelerated the diffusion of the Basel frameworks across the developing world, as documented by the World Bank survey. The survey results suggest a somewhat increased emphasis on higher-quality capital in regulatory capital relative to earlier surveys. For example, respondents in the more recent survey were less likely to include subordinated debt in regulatory capital (figure 2.7). Also, since the 2007 survey, seven countries have added basic leverage ratios (with
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Figure 2.3 Introduction of Deposit Protection Schemes (Have you introduced changes to your deposit protection system as a result of the global financial crisis?)
Increase in amount covered
Expansion of coverage (types of exposures, nature of depositor, and so on) Government guarantee of deposits and bank debts Only minor changes or no change 0
5
10
15
20
25
30
Number of responses Source: World Bank’s Bank Regulation and Supervision Survey (database), 2011.
narrow definitions of capital and without risk weighting) to their minimum requirements. This trend is likely to continue as countries move toward Basel III. As for the impact of Basel III, recent calculations (such as Majnoni 2012) suggest that Basel III implementation may, in contrast to Basel II, be relatively easier for developing economies than for developed ones, given that the former have built relatively higher capital buffers. Indeed, minimum required as well as actual risk-based capital ratios of banking systems tend to be relatively higher in developing economies (figure 2.8). However, higher capital (and liquidity) buffers may also be warranted, considering that emerging-market and developingeconomy banks operate in a more volatile economic environment. Also, a common observation from assessments under the World Bank/IMF’s Financial Sector Assessment Program and other diagnostic work is that high reported capital buffers overstate the true resilience of financial institutions in light of deficiencies in accounting and regulatory frameworks, especially as regards loan classification, provisioning, and consolidated supervision. To examine the likely impact
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