Compliance with the latest incarnation of the Basel accord is patchy, with some developing countries still struggling to comply with earlier versions.

With the regulatory discussion for the world’s biggest banks all centred around Basel III, and even so-called Basel IV, it is easy to forget that for some banks in emerging markets, the challenge is still to comply with Basel II. According to the The Banker Database, 139 of the Top 1000 World Banks are yet to make themselves Basel III compliant and 58 are still on Basel I.

Take Mongolia and Vietnam, for example, which both have banking systems that are less advanced than most, so need extra time to prepare. Not only do they have to raise capital for regulatory requirements but with rapid credit growth in both countries in the past three to five years, they need a whole lot more capital anyway.

Added to this, in Mongolia there are demands from the International Monetary Fund – the country is currently under a support regime – to improve asset classification and strengthen supervisory capacity.  Mongolia is moving to Basel II with some aspects of Basel III, including higher Tier 1 requirements for domestic systemically important banks.

In Vietnam, the banks are moving towards Basel II implementation coming from a background of thin capital, low risk weights and little (if any) capital provision for operational risk.

The world’s larger economies are not immune from the pressures of upgrading, especially if there have been ongoing weaknesses in the banking sector, such as in India. There the push is to comply with Basel III, and the Reserve Bank of India (RBI) has raised the bar by requiring capital to be 1% higher than the level set down by the Basel Committee on Banking Supervision. There is even a battle going on between the RBI and the parliament, which would like to relax these additional controls to free up funds for lending.

Then for systemically important banks there is the additional challenge of total loss-absorbing capacity requirements on top of Basel III. China’s banks need to raise $467bn by 2025 but the deadline could come earlier if the country is no longer categorised as an emerging market.

The answer to all these woes is, of course, deeper and more liquid bond markets in which to raise the additional capital. Some countries do have these, but for others they remain very much a work in progress. Unless they develop more rapidly, the struggle to move up the regulatory curve will be a whole lot tougher. 

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