Are recommendations of Basel Regulatory Framework universally applicable?

Abstract

Though increased number of countries are taking radical steps towards converging their banking regulations with the recommendations made by the Basel Committee on Banking Supervision (BCBS), underlying unique characteristics of respective country’s socioeconomic background and the suitability of such recommendations for them have been largely neglected during the process of adoption and implementation. We argue that banking regulators under the Basel regulatory framework could benefit from the capital requirements in terms of reducing the likelihood of insolvency of banks, but these standards have possible ill-effects for other important objectives of banking regulations, in particular, Basel framework does not necessarily contribute to the improvement of financial intermediation and accumulation of credit risk management skills in the monitoring process. Moreover, blind adoption of Basel regulatory framework in most of the developing countries, where the preconditions are largely absent, creates adverse consequences on economic activity. We raise related experiences from Japan, Indonesia and Sri Lanka.