Thursday, January 19, 2012

Basel 3 and Indian banks

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.


pay2gain said...

The post was very informative. I hope that the the capital structure of the india will be benefitted by this basel 3.

basel III said...

One cannot appreciate the importance of this new approach to the governing of credit creation without first understanding the severity of the current deadlock in our thinking about the governing of banks (which is where the vast majority of credit creation takes place).