Identifying the Effects of Regulatory Reforms on Emerging Market and Developing Economies: A Review of Potential Unintended Consequences
At the request of the G20 Finance Ministers and Central Bank Governors, the FSB, in collaboration with the IMF and World Bank, has prepared this study to identify the extent to which the agreed regulatory reforms may have unintended consequences for EMDEs.
The intent of the study is not to re-open recent internationally agreed reforms but to better understand the possible effects of those reforms in the context of broader post-crisis developments on EMDEs. In so doing, the study should enhance financial stability by facilitating the timely, full and consistent implementation of the reforms.
There is widespread support among EMDEs for the objectives of the agreed reforms, although there is also a broad range of views regarding the extent to which these reforms are having, or expected to have, an impact on their financial systems.
This heterogeneity in perspectives can be attributed to the early stage of implementation of these reforms and to the diversity of EMDE financial systems, which give rise to different considerations and concerns. As a result, most of the responses received by national authorities from EMDEs concerning unintended consequences reflect respondents' expectations and concerns regarding potential future effects.
While many EMDEs do not expect significant adverse effects from the implementation of the reforms, those respondents that did identify unintended consequences focused on a few key areas.
The main issues raised are as follows:
- Basel III capital framework - that the risk weighting of assets in the trading book and for securitised products under Basel 2.5, the convertibility of certain capital instruments, differences in the measurement of risk between a parent bank and its subsidiary, capital requirements for certain business activities (such as trade finance) as well as higher overall capital requirements may exacerbate deleveraging and increase the costs of global banks operating in EMDEs, thereby reducing credit and financial market liquidity;
- Basel III liquidity framework - that the definition of high quality liquid assets and the calibrations used in the calculation of the liquidity ratios do not accurately reflect EMDEs' financial market structures, which may adversely affect the functioning of the domestic financial markets and the lending capacity of banks in EMDEs;
- policy measures for global systemically important financial institutions (G-SIFIs) - that higher capital requirements imposed by home authorities for G-SIFIs may disproportionately impact their operations in EMDEs and lead to their retrenchment or raise the cost of intermediation, and that host authorities may not always be invited to participate in the crisis management group or resolution planning for those firms even if their operations in the host jurisdiction are systemically important; and
- over-the-counter (OTC) derivatives reforms - that the various implementation and policy issues being discussed have not enabled EMDEs to determine what derivatives-related infrastructures to establish domestically or how best to regulate cross-border OTC derivatives transactions, and that changes in the market landscape as a result of the reforms underway in major jurisdictions may raise hedging costs for end users in EMDEs and place domestic central counterparties at a competitive disadvantage vis-à-vis global ones, which may impede the development of domestic derivatives markets. Continue reading