Author: Peter Knaack
Bolivia had very ambitious plans to implement Basel standards, but these only partly came to fruition. A novel financial services law promulgated in 2013 established the legal framework for a wholesale adoption of Basel II, including all advanced internal ratings-based components, and elements of Basel III. It is puzzling to see such a whole-hearted embrace of Basel standards by a domestically oriented left-wing government that follows a heterodox approach to economic policymaking.
Basel adoption has been driven by a regulatory agency that is embedded in transnational technocratic regulators networks and actively seeks to implement international standards. Bolivian regulators wrote a wide range of Basel rules into the draft legislation. For this reason, the case can be understood as an instance of regulator-driven convergence. But the Bolivian government, prioritising the twin goals of financial stability and inclusive growth, grafted onto this legislation significant interventionist policies.
Thus, Bolivia’s Basel adoption is pulling in two directions: adherence to Basel Committee-style best practices and, concurrently, financial interventionism to stimulate economic growth and financial inclusion. It would be a mistake, however, to interpret the gap between the number of Basel components in the legal framework and the ones in force as an instance of mock compliance, as there is no evidence for substantial non-compliance with the standard approach to Basel II. Rather, the implementation gap may be understood as a strategic device, potentially due to reputational benefits and due to the relationship between the government and the regulatory agency.
Political economy background
In power from 2005 to November 2019, the administration of Evo Morales was opposed to the neoliberal stance of its predecessors, espousing a developmental state model instead. Commodities represent most of Bolivia’s exports. Supported by macroeconomic stability and the commodities boom, Bolivia’s financial sector experienced a period of sustained growth and record profits. The favourable global environment provided the former government with the opportunity to dramatically increase social spending while implementing a prudent and counter-cyclical macroeconomic policy.
|GDP per capita (current USD)||3,393|
|Bank assets (current USD)||18.6bn|
|Bank assets (% of GDP)||54.9|
|Stock market capitalisation (% of GDP)||15.9|
|Credit allocation to private sector (% of GDP)||64|
|Credit allocation to government (% of GDP)||0.9|
|Polity IV score (2017)||7|
Note: All data is from 2016 unless otherwise indicated
Source: FSI Database, IMF (2018), GDI Database, World Bank (2017); Polity IV (2014)
Basel implementation to date
The Financial Services Law of 2013 provides the legal framework for a wholesale adoption of Basel II and parts of Basel III. According to the law, Bolivia has adopted all ten components of Basel II, and two out of eight Basel III components. Yet the implementation gap is large, as only a small subset of these Basel rules is currently in force.
The law, however, does not represent a coherent move towards the kind of strictly regulated market-based financial system that the Basel Committee envisions. Instead, it contains a series of policies that pull in the opposite direction, such as lending caps and credit quotas for selected sectors of the economy. The purpose of these interventionist measures is to steer the financial system towards inclusive growth. The Bolivian financial services law can thus be understood as the result of tensions between politicians and technocrats in the policymaking process.
Politics of Basel implementation
Bolivian regulators regard Basel as the gold standard in prudential regulation, and they played an important role in drafting the law. The regulator’s support for Basel standards is partly due to their strong international orientation, reflected in strong connections to international regulatory peers. The Bolivian regulator (ASFI) has a relatively high degree of independence, so was able to successfully advocate for its adoption. Yet the implementation of the more sophisticated Basel components remains on hold due to capacity constraints at the regulatory agency and a lack of private sector demand.
As the draft law changed hands from regulators to politicians, interventionist policy instruments were grafted onto the prudential regulatory framework. The Morales administration did regard Basel standards as a market-indulging policy recipe of neoliberal extraction, at least initially. Whether politicians were oblivious to the ambitious incorporation of Basel components into the 2013 financial services law, or whether they endorsed it as a strategic move to signal prudential rigour to domestic and foreign investors remains unclear as there is supporting evidence for each explanation.
Bolivian banks, as well as other market actors, have been ambivalent towards Basel adoption at most. The Bolivian banking sector is profitable and vibrant, but its operations are traditional and domestically oriented. Foreign banks play a marginal role in the domestic market. Domestic banks count on large enough capital buffers to meet Basel II and III requirements. No bank has submitted internal risk-based models for regulatory approval yet, and only a few large banks have even considered taking steps in this direction. Thus, while the legal framework is in place for the more sophisticated components of Basel standards, the implementation of these components is limited to date.