Background Paper: Basel Implementation in Low and Lower-Middle Income Countries – Early Adopters of Basel III

In 1988, the Basel Committee on Banking Supervision, a body devoted to regular cooperation between members on financial regulation, agreed global financial standards known as the Basel Accords. The purpose of the accords is to ensure that financial institutions have enough capital on hand to meet their obligations and to absorb unexpected losses, including those arising from systemic risks. The standards are non-binding in nature. Basel Committee members negotiate them and agree voluntarily to implement and comply with them. The standards do not create any obligations on non-members. While the Basel Committee originally included only the Group of Ten countries,[1] it now includes 27 countries: G-20 members and other banking centres.[2] The Committee has published three iterations of the accords, Basel I in 1988, Basel II in 2004 and Basel III in 2010. Basel III seeks particularly to respond to supervisory gaps revealed by the global financial crisis.

Data collected by the Financial Stability Institute (FSI) shows that many non-member States, including low and lower-middle income countries (LICs and LMICs), are implementing elements of the Basel standards, despite having no obligation to do so. Academics have not yet systematically examined this phenomenon. In particular, there exists virtually no research on the mechanisms for adoption of Basel standards in LICs and LMICs, and whether and to what extent Basel standards are adapted in the process of implementation. This paper seeks to fill that gap in the scholarship.

The study thus focuses on the following elements of Basel adoption in LICs and LMICs:

• the speed of Basel standards adoption by LICs and LMICs,
• which elements of the Basel standards they adopt,
• any tailoring of the standards to the national context,
• the governance arrangements under which LICs and LMICs implement the standards, and
• the structural independence from the ruling or banking elite of those charged with deciding whether to implement the standards.

To examine these elements of Basel adoption, I developed four case studies from a subset of countries which have been particularly active in implementing Basel standards: LICs and LMICs which have already begun adopting Basel III, the 2010 accord. The case studies look at the implementation of Basel I, II and III.[3]

Per the 2015 FSI Basel Implementation Survey, LIC and LMIC countries implementing Basel III are: Bangladesh, Kenya, Zimbabwe, Liberia, Morocco, Egypt, Georgia, Nigeria, Pakistan, the Philippines, and Sri Lanka (n=11). I developed case studies of Bangladesh, Kenya, the Philippines and Sri Lanka (n=4). I chose this sample because only these countries had high quality, relatively comprehensive, English language data available online. Fortuitously, the sample shows a range of implementation strategies, from full implementation in Bangladesh to extremely limited implementation in Sri Lanka. It also shows a spectrum of governance structures for Central Banks.

It is important to appreciate that this research looks at the enactment of elements of the Basel accords in LICs and LMICs, rather than the extent of implementation after the regulations are in place. Further, it examines the legal structures of decision-making bodies and their relationship to government, rather than the way those relationships are navigated in practice. Research of that kind would require qualitative data from a variety of participants in each examined banking jurisdiction, collection of which is beyond the scope of this paper.

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