Dealing with the Challenges of Macro Financial Linkages in Emerging Markets

World Bank Office Jakarta.Bali,December 1,2011. The World Bank, in cooperation with Bank Indonesia, today kick off a joint international seminar to examine the challenges in dealing with macro-financial linkages in emerging markets, along with the appropriate policy responses. One of the key policies options to be explored over the course of the two-day seminar would be the impact of Basel III banking regulations on emerging economies. Basel III is the new global standard on bank capital adequacy and liquidity, developed in response to the deficiencies in financial regulation revealed by the global financial crisis. In the financial sector, Basel III aims to strengthen not just micro prudential regulations, but also the macro prudential regulations that help stabilize financial systems as a whole.

“The global financial crisis has raised the importance of macro-financial linkages and the need for macro prudential regulations. Given the state of global finances, the time is right for regulators from emerging economies to meet and discuss how they can strengthen financial systems and reduce vulnerability against external shocks,” says Dr. Otaviano Canuto, World Bank Vice President for Poverty Reduction and Economic Management.

The requirements of Basel III include the need for banks to hold 4.5% of common equity and 6% of Tier I capital of risk-weighted assets. Basel III also introduces additional capital buffers, such as a discretionary countercyclical buffer, which allows national regulators to require up to another 2.5% of capital during periods of high credit growth. In addition, Basel III introduces a minimum 3% leverage ratio and two required liquidity ratios. The proposed measures under Basel III aim to dampen the pro-cyclicality of the financial sector and to reduce systemic risks, including by introducing measures to address liquidity.

“The policy debate currently taking place is largely in the context of the advanced industrial countries. Yet emerging markets face a different reality which would require more customized policy measures,” says Dr. Swati Ghosh, Economic Adviser, World Bank. “In emerging markets, the interaction between real and financial sectors often accentuates pro-cyclicality.”

“Emerging markets are particularly vulnerable to hot money flows, which can exacerbate financial pro-cyclicality and real sector cycles,” says Dr. P.S. Srinivas, the World Bank’s Lead Financial Economist for Indonesia.

The “Dealing with the Challenges of Macro Financial Linkages in Emerging Markets” seminar brings together central bank governors, deputy governors and senior officials from various regulatory and supervisory authorities from ASEAN+3 and G-24 countries.

World Bank Office Jakarta.Indonesia Stock Exchange Building.Tower 2, 12th Floor (62-21-5299-3000)
Contact: In Jakarta:Randy Salim: (62-21) 5299-3. rsalim1@worldbank.org

In Washington DC: Mohamad Al-Arief  (1-202) 458-5964 malarief@worldbank.org a

Cross border banking supervision : incentive conflicts in supervisory information sharing between home and host supervisors

The global financial crisis has uncovered a number of weaknesses in the supervision and regulation of cross border banks. One such weakness was the lack of effective cooperation among banking supervisors.

Since then, international bodies, such as the G-20, the Financial Stability Board and the Basel Committee have actively promoted the use of supervisory colleges. The objective of this paper is to explore the obstacles to effective cross border supervisory information sharing. More specifically, a schematic presentation illustrating the misalignments in incentives for information sharing between home and host supervisors under the current supervisory task-sharing anchored in the Basel Concordat is developed.

This paper finds that in the absence of an ex ante agreed upon resolution and burden-sharing mechanism and deteriorating health of the bank, incentive conflicts escalate and supervisory cooperation breaks down. The promotion of good practices for cooperation in supervisory colleges is thus not sufficient to address the existing incentive conflicts.

What is needed is a rigorous analysis and review of the supervisory task-sharing framework, so that the right incentives are secured during all stages of the supervisory process. For this purpose, it is essential that policy makers integrate and harmonize the current debates on crisis management, resolution policy and good supervisory practices for cross border banking supervision

Author: D'Hulster,Katia;Document Date:  2011/11/01. Document Type: Policy Research Working Paper. Report Number: WPS5871.Volume No:  1 of 1

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