Finance: Research, Policy and Anecdotes

As reported earlier, I was part of a research project on the determinants of adoption of international regulatory standards in emerging and developing economies. My colleagues have now put together an excellent website with lots of important information, not just for academics, but also analysts of regulatory frameworks and policy makers wanting to look across their borders. The website shows which elements of Basel II/III have been adopted by which countries and explores the factors that explain why different countries have chosen specific adoption strategies, including several highly insightful case studies from Asia, Africa and Latin America.  Also, on the website are two policy notes, one directed at regulators in EMDEs concerning their approach to adoption of Basel II/III and one directed at international institutions (including the Basel Committee) to ensure that such international standards are more appropriate for developing countries.

But the main focus of the project has been the factors explaining of why different developing countries have chosen different paths towards the adoption of international regulatory standards. To summarise the findings

Basel II and III adoption in developing countries is widespread but selective.  While some might see this as slacking, this can also be interpreted as a signal of a cautious approach by developing countries regulators to international standards to which most had no input and which might not fit the needs of their economies.

Three key actors shape Basel standards adoption in specific countries: regulators, politicians, and domestic banks, consistent with the political economy literature on financial sector development – to understand cross-country variation in financial sector policies, in this case, regulatory frameworks, one has to understand the politics behind the adoption/implementation of such frameworks and the interests and relative powers of different groups.

You might wonder what is new – well, to my best knowledge this is the first time researchers have taken a systemic look at the adoption of international banking standards – a cross-country approach combined with a number of detailed and diverse case studies that shows different models, ranging from no adoption (Ethiopia) over mock compliance (Vietnam) to selective adoption to foster financial development and a financial centre approach (Nairobi). The different case studies helped identify very different reasons for adoption:

• Signalling sophistication to international investors. For example, in Ghana, Rwanda, and Kenya, politicians have advocated the implementation of Basel II and III, and other international financial standards, as part of a drive to establish financial hubs in their countries.
• Reassuring host regulators. Banks headquartered in developing countries  may endorse Basel II or III as part of an international expansion strategy, as they seek to reassure potential host regulators that they are well-regulated at home. We see this at work in Nigeria, where large domestic banks have championed Basel II/III adoption at home as they seek to expand across Africa.
• Facilitating home-host supervision. Adopting international standards can facilitate cross-border coordination between supervisors. In Vietnam, for example, regulators were keen to adopt Basel standards as their country opened up to foreign banks, to ensure they had a ‘common language’ to facilitate the supervision of the foreign banks operating in their jurisdiction.
• Peer learning and peer pressure. Even while acknowledging the shortcomings of Basel II and III developing country regulators often describe them as international ‘best practices’ or ‘the gold standard’ and there is strong peer pressure in international policy circles to adopt them. In the West African Economic and Monetary Union (WAEMU), for example, regulators are planning an ambitious adoption of Basel II and III with the support and encouragement of technocratic peer networks and the IMF.
• Technical advice from the International Monetary Fund and the World Bank can play an important role in shaping the incentives for politicians and regulators in developing countries, although their recommendations vary across countries.

As I had discussed earlier, I am also co-leading (with Liliana Rojas-Suarez at the Center for Global Development) a Taskforce on Basel III adoption in emerging and developing markets, where the focus is more on identifying specific recommendations to improve the fit of such international regulatory standards for these markets. The report is not due until next year, but understanding the reasons of why or why not countries adopt Basel III can certainly help in the analysis.

Overview