The Basel Capital Accords in Developing Countries: by R. Gottschalk

By R. Gottschalk

This booklet is ready the recent capital adequacy framework – referred to as Basel II – licensed through the Basel Committee in 2004. It goals to debate Basel II implementation in several different types of constructing international locations, together with rising marketplace economies, resembling Brazil and low-income international locations resembling Ethiopia and Zambia.

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Finally the chapter concludes suggesting that introduction of reforms in the Basel Capital Accord should be accompanied by developing country efforts to have in place a financial system that support social and economic development. Notes 1. On the role of the financial system in fostering economic growth and poverty reduction, see Spratt (2008). 2. In this regard, the Basel Committee set up a Working Group in 2003 composed of representatives from mainly non-G-10 countries, including Brazil, to assess Basel II and provide recommendations on how supervisors might want to promote changes toward the new framework (Basel, 2004).

The effects of Basel I both in Brazil and India thus clearly demonstrate that changes in the regulatory framework for banks can have important effects on the structure of the banking system and on credit patterns. It is therefore important to avoid a repeat of the negative consequences that Prudential Norms for the Financial Sector 33 often accompany the introduction of new banking rules. Particularly at a time when international efforts are being made to reduce poverty worldwide, it is important to raise awareness – and encourage the debate, for the SMEs and the poor on the possible negative implications of the new capital rules which include Basel II – intended to be implemented by many countries around the world between 2007 and 2015.

In contrast, using a sample of US banks in New England, Peek and Rosengren (1995) find empirical evidence that the new regulatory framework caused a capital crunch in New England banks over that 1990–1991 period which, in turn, may have caused a credit crunch. The reason their work was limited to New England banks is that it was a way to control for the macroeconomic factors, which were common to all banks of a same region. Ediz, Michael and Perraudin (1998) looked at the regulatory effects on UK banks, focusing on two questions: first, the impact of capital requirements on bank capital, especially when the capital ratio is close to the minimum required, and second, whether and how banks adjust their balance sheets when they raise their capital ratios.

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