Tough global bank reforms will be disproportionately difficult to implement in developing economies and will damage their growth, a global taskforce of bankers and businessmen from emerging markets is set to warn.
The so-called Basel III rules will impose capital and liquidity requirements that were designed for U.S. and Europe institutions but would be difficult to implement in emerging economies, according to a report set to be issued on Sunday by the B20 group of businesses, which advises the G20 group of nations.
Peter Sands, chief executive of Standard Chartered and co-chair of the B20 taskforce that prepared the report, told the Financial Times that the rules on liquidity, counterparty risk and trade finance will also cut the supply and raise the cost of credit in those economies.
“The thrust of the reforms has been about what Europe and the U.S. need to do. Some of these things are going to have unintended consequences and can be quite dangerous” for parts of the world where the financial system is less developed.
For example, the taskforce argues that developing economies will be hit particularly hard by the part of Basel III known as the “liquidity coverage ratio” that requires banks to hold assets that are easy to sell in the event of a market crisis.
The LCR calls for banks to hold high-quality corporate and government bonds which are in short supply in countries with fledgling capital markets and nonexistent in countries following Islamic finance rules.
Similarly, the B20 taskforce – co-chaired by Guillermo Ortiz, chairman of Mexico’s Grupo Financiero Banorte – argues that emerging market banks are unfairly penalized by how the Basel III measures counterparty risk.
Western banks can hedge their risk by buying credit default swaps, a derivative that acts as a kind of insurance – on their counterparties. However, CDS are not available for many developing market companies and banks.
Research by BBVA, the Spanish bank with a large presence in the developing world, has found that a 20 per cent increase in capital stocks and liquidity reserves would cut per capita gross domestic product by 2 per cent world wide, but by 3 per cent in emerging markets.
The B20 group also raises concerns that as European banks shed an estimated €2tn in assets to meet the Basel III rules, they will pull out of developing markets, cutting competition and thus upping the cost of credit.
The Basel Committee on Banking Supervision, which writes the global rules, is already looking at changes to the LCR, including alternatives to government bonds.
Richard Reid, research director of the International Center for Financial Regulation, said, “The more that developing countries emphasize their particular needs, the more this raises the question of regulatory arbitrage. But at least in the near term I suspect the concerns about growth will outweigh this issue.”