Capital Requirements under Basel III in Latin America: The Cases of Bolivia, Colombia, Ecuador and Peru - Working Paper 296

Liliana Rojas-Suarez
Authors registered in the RePEc Author Service: Liliana Rojas-Suarez, Arturo José Galindo and Marielle del Valle

No 296, Working Papers from Center for Global Development

Abstract: A number of banks in developed countries argue that the new capital requirements under Basel III are too stringent and that implementing the proposed regulation would require raising large amounts of capital, with adverse consequences on credit and the cost of finance. In contrast, many emerging market economies claim that their systems are adequately capitalized and that they have no problems with implementing the new capital requirements. This paper conducts a detailed calculation of capital held by the banks in four Latin American countries—known as the Andean countries: Bolivia, Colombia, Ecuador and Peru—and assesses the potential effects of full compliance with the capital requirements under Basel III. The conclusions are positive and show that while capital would decline somewhat in these countries after they make adjustments to comply with the new definition of capital under Basel III, they would still meet the Basel III recommendations on capital requirements. More importantly, these countries would hold Tier 1 capital to risk-weighted-asset ratios significantly above the 8.5 percent requirement under Basel III. That is, not only the quantity, but also the quality of capital is adequate in the countries under study. While encouraging, these results should not be taken as a panacea since the new regulations are only effective if coupled with appropriate risk management and supervision mechanisms to control the build-up of excessive risk-taking by banks. Further research into these areas is needed for a complete assessment of the strength of banks in the Andean countries.

JEL-codes: G21 G28 G32 G38 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2012-05
New Economics Papers: this item is included in nep-ban, nep-cba, nep-lam and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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