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Reforming Bank Capital Requirements: Implications of Basel II for Latin American Countries

Giovanni Majnoni () and Andrew Powell

Economía Journal, 2005, vol. Volume 5 Number 2, issue Spring 2005, 105-149

Abstract: The controversial proposal to overhaul the international accord regarding the regulation of bank capital was completed in 2004, and the thirteen Basel Committee member countries are set to implement the new accord, known as Basel II, by 2007. We develop a Basel II decision tree to guide policymakers facing the issue of whether to adopt the new accord. We also estimate credit risk in banks across three Latin American countries using a homogeneous methodology. Our findings suggest that Latin America falls between the two main Basel II alternatives. Non-G10 countries may thus wish to recalibrate Basel II's internal ratings-based (IRB) approach. Alternatively, we propose an intermediate centralized ratings-based (CRB) approach. We argue that the CRB approach may be made compatible with Basel II by developing an integrated policy for provisions and capital. We perceive a danger that Basel II may be adopted too quickly or inappropriately and may then represent the end of a standard rather than the establishment of a new one. We suggest that a Basel II-compatible CRB approach with homogeneous definitions would enhance true comparability.

Keywords: Bank regulation; solvency ratios; loan loss reserves; emerging economies (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2005
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