Under Basel 2, international banks were said to be at an advantage: they could lower their capital requirements through the use of advanced models. This, it was feared, would widen the gap between rich country banks and emerging market banks. In my view, Basel 3 holds out the promise that some emerging market banks, including those in India, can turn the tables on their rich country counterparts.
Basel 3 requires banks to hold more capital. That won't be easy for rich country banks, given that growth prospects are dim in the medium term and markets are under stress. They will do what they are already doing, namely, meet capital norms by shrinking their balance sheets. In contrast, banks in India and some other emerging markets can hope to raise capital on the strength of high loan growth and attractive returns to assets. They should be able to marry higher capital adequacy with growth- and, in the process, narrow the difference in market capitalisation over the next five years or so. Thus, under Basel 3, capital promises to be a source of competitive advantage- for some emerging market banks.
More in my ET column, Indian banks' capital edge.
Thursday, January 19, 2012
Wednesday, January 18, 2012
World Bank paints a grim picture
The World Bank's latest Global Economic Prospects paints a grim picture of the world economy, FT reports. It rightly sees the Eurozone crisis as being contained, not resolved. It allows for the possibility of the crisis getting out of hand in 2012. And it makes clear that emerging markets will be hit hard by any financial crisis centred on the Eurozone.
Emerging markets growth is projected at 5.4% in 2012, down from 6% in 2011. If the Eurozone erupts, it could shave 4.2% of growth off emerging markets. One of the channels through which emerging markets will be impacted is deleveraging of banks in high-income countries. Emerging markets in which these banks operate in a big way could see foreign subsidiaries being sold off or a sharp reduction in wholesale funding. Indeed, this is one argument against an enlarged foreign bank presence in India.
Mercifully, India is not among the 30 emerging markets with large funding requirements that would be hit hard.
Emerging markets growth is projected at 5.4% in 2012, down from 6% in 2011. If the Eurozone erupts, it could shave 4.2% of growth off emerging markets. One of the channels through which emerging markets will be impacted is deleveraging of banks in high-income countries. Emerging markets in which these banks operate in a big way could see foreign subsidiaries being sold off or a sharp reduction in wholesale funding. Indeed, this is one argument against an enlarged foreign bank presence in India.
Mercifully, India is not among the 30 emerging markets with large funding requirements that would be hit hard.
Thursday, January 05, 2012
Businessmen are overdoing the gloom
The prime minister and the finance minister did some plain-speaking with businessmen a few weeks ago about the economic climate in the country- how businessmen were creating a strong sense of negativity all round with their comments on 'policy paralysis' and its impact on the economy.
I thought even then that their plain-speaking was warranted. I am even more convinced after studying the figures on foreign capital flows. It is simply not true that foreign capital is shunning India. On the other hand, there is reason to believe that the long-term trends in flows are extremely positive, no matter that FIIs may have fled for the moment. I think the trends in FDI are particularly heartening, notably, the fact that FDI in the post-crisis period has been higher than in the India Shining period.
More in my ET column, Foreign money still pouring in.
I thought even then that their plain-speaking was warranted. I am even more convinced after studying the figures on foreign capital flows. It is simply not true that foreign capital is shunning India. On the other hand, there is reason to believe that the long-term trends in flows are extremely positive, no matter that FIIs may have fled for the moment. I think the trends in FDI are particularly heartening, notably, the fact that FDI in the post-crisis period has been higher than in the India Shining period.
More in my ET column, Foreign money still pouring in.
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