Emily Jones presents research at the Bank for International Settlements, Switzerland

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The political economy of bank regulation in developing countries: risk and reputation

Emily Jones, GEG's Director, was invited by the Bank for International Settlements to a global workshop on proportionality on financial regulation and supervision, on 8 May, in Basel, Switzerland. The meeting brought together banking regulators from more than 20 industrialised and developing countries, and experts from the IMF and Financial Stability Institute.  

Emily presented her research on the implementation of Basel II and III in developing countries. Emily challenged the notion that Basel standards are ‘international best practice’, highlighting the challenges that implementing the full suite of Basel standards poses for developing countries, particularly low income developing countries. She shared the findings of her research project, which reveal how political economy dynamics create very strong incentives for regulators in developing countries to converge on international standards even when the standards are poorly-suited to their regulatory context. In particular, governments implement standards in order to signal the attractiveness of their financial sectors and banks to international investors, to reassure host regulators that their banks are soundly regulated at the parent level, and to facilitate communication between home and host supervisors.

Recognising that reputational signalling is important for governments in developing countries, she proposed that regulators adopt a proportionate approach to the implementation of international standards. For instance, regulators can adopt the standards selectively, implementing only those aspects that are well-suited to the local context, and regulators can opt to apply them only to the large internationally active banks, rather than all commercial banks. She called on the Basel Committee, IMF and World Bank to work to ensure that international standards are designed so that they are better suited to the needs of developing countries.