Global banks and the adoption of the new regulatory framework: effects on the financing of emerging markets and developing economies

A. Carstens

Financial Stability Review, 2015, issue 19, 111-118

Abstract: As a result of the international regulatory reform, global banks will be subject to higher capital and liquidity requirements, as well as leverage ratios. In addition, some jurisdictions are implementing other measures with the aim of separating trading activities from traditional commercial banking. While these measures will strengthen the resilience of global banks, they could also have significant consequences for the financing of emerging markets and developing economies (EMDEs). Global banks are subject to consolidated supervision. They manage their risks and maximise their expected risk-adjusted returns by consolidating all their subsidiaries’ assets and liabilities with those of the parent bank. Risk-weighted assets, liquidity coefficients and leverage ratios are calculated on a consolidated basis under the rules and supervision of the home jurisdiction’s regulator. Assets held by subsidiaries result in capital charges and liquidity requirements for the global group as a whole. However, the application of home-country regulations across the entire group could end up increasing capital charges disproportionally for subsidiaries established in EMDEs, going against the desired result of the reform of establishing higher standards under a leveled playing field. In addition, the regulatory priorities of advanced economies that are home to these global banks could conflict with the policy priorities of EMDEs. These present EMDEs with a difficult dilemma: how to finance the needs of their growing economies without jeopardising financial stability.

Date: 2015
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