Basel II Adaptation for Latin America

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The newly agreed Accord for minimum capital requirements for banks is to be implemented across the region in the coming years. However, Basel II includes many alternatives, many parameters to be determined subject to national discretion, it does not emphasize certain emerging country issues and is calibrated using data primarily from G10 countries. A danger is that, because the Accord as written is not a perfect fit for emerging economies, individual countries will adapt the Accord in different ways for domestic implementation and the essence of a standard will be lost. The objective of this project is to consider how countries are adapting Basel II for domestic implementation, consider the fundamental objectives of the Accord and suggest a standard adaptation for Latin America. The project will focus on between 5-7 countries.Basel II is an international accord agreed by the Basel Committee of Banking Supervision made up of a group of developed countries - an expanded G10. It is important to agree a set of international bank capital standards to ensure a level playing field for competition and to ensure adequate safeguards - as banks and banking is global so is the risk including the risk of contagion. However, Basel II contains many alternatives, those alternatives are calibrated for G10 countries and there are some areas that are important for LAC, which are not considered. What is happening at present is that different countries in the region are adopting different Basel II alternatives and doing their own thing regarding the very many specific issues involved. Given the Basel II framework is so wide and in many instances imprecise, there is a strong need for a regional effort to agree a common adaptation for LAC. This would have multiple benefits. First by analyzing the issue in several emerging economies an appropriate standard for those countries could be found - difficult to achieve with information on just one country. Second, the likely result from what is happening at present is not a level playing field. As international banks operate across the region and regional banks increase their activities, a common adaptation would help re create that objective and simplify cross-border issues immensely. Third, an effort in this direction would only serve to enhance cooperation within the region on financial supervision, particularly important where there is considerable financial integration. Fourth, a standard adaptation for LAC would take into account the many emerging economy issues present and provide a useful counterweight to the current agreement, written largely with G10 in mind.