New international liquidity requirements favour banks based in countries with highly developed capital markets. This is harsh on well-capitalised emerging market banks.
With all the clamouring from banks in the West about the difficulties of implementing the Basel III framework, it is easy to forget that emerging market lenders will also be affected. For them, the concern is not so much the new capital levels – the largest emerging market banks in countries such as Brazil, Russia and Mexico already have high capital adequacy ratios.
Instead, the worst headaches are being caused by Basel III’s liquidity requirements. These have two parts: a liquidity coverage ratio (LCR), which will make banks hold enough easily salable assets to survive a month-long funding squeeze; and a net stable funding ratio (NSFR), which covers a longer period and will in practice force lenders to match the tenor of their liabilities and assets more closely.
Some emerging market regulators, including South Africa’s central bank, have opted to address the LCR by creating short-term liquidity windows that their lenders can access when under stress. The NSFR issue is not so easy to solve, however. Most emerging market lenders fund themselves with deposits, which are almost by definition short term. Getting them to ramp up their wholesale borrowing is largely unfeasible given the shallowness of their local bond markets.
For banks in countries with a well-developed local institutional investor base – Brazil and South Africa are two that come to mind – this is a problem regulators can help with. South Africa recently allowed domestic pension funds to invest up to 75% of their assets in bank bonds, up from 25% previously. But such measures will not be enough on their own.
While Basel III’s intentions are noble and mostly necessary, it has been designed with developed world banks in mind. Its architects should allow for enough flexibility so that emerging markets with rising middle classes do not see their mortgage sector and infrastructure investment strangled.
The NSFR will not be enforced until 2018. That might seem a long way off, but given its complexity and importance, the work must start now to make sure it is compatible with banks across the globe.
