Felaban calls for modifications to Basel III

While debate over Basel III regulation may be closed in the minds of most G20 signatories, it ought to be re-opened to consider the realities of banks in Latin America, where key risks are set to emerge if more proportional regulation is not adopted, according to Latin American banking federation Felaban.

In a recent note, Felaban stressed that many Latin American countries have shallow capital markets, low levels of financial inclusion, financing restrictions (internal and external), high levels of asymmetric information, and business models with very different levels of diversification – just some of the factors that the trade group considers that Basel III does not adequately address.

“The concern focuses on the way in which said regulatory standards can be applied under certain modifications in their own jurisdictions, or which subset of banking entities should be subject (totally or partially) to said prudential regulations” wrote Felaban. “Hence, [the need for] debate about the need and scope of regulatory proportionality in the banking sector.”

Felaban sees the current regulation generating fixed costs that affect smaller banks more, where higher compliance costs could force banks to allocate resources to the benefit of consumers and even encourage shadow banking.

High regulation can also create barriers to new entrants in Latin America, promoting market concentration, and potentially affecting financial market stability, said Felaban.

One-size-fits all regulation could also generate systemic risks with actors forced to react to stresses in a similar or identical fashion, reinforcing negative side-effects, though also potentially multiplying positive effects for the intended benefits of the regulation.

“One way to apply the above lies in the imposition of simpler and less complex regulatory requirements to certain entities,” wrote Felaban. “This makes sense since large and / or complex banks can exploit economies of scale derived from their size (in regulatory and compliance matters), something that small banks are unable to carry out.”

“However, this does not mean that these latter entities are exempt, in whole or in part, from compliance with key regulatory requirements (for example, through lower solvency or liquidity ratios),” wrote the federation.

That said, Felaban also warned that less restrictive regulations would need to be implemented with caution to prevent smaller entities from assuming irresponsible risk levels. The trade group specifically warned against any adjustments to regulation actually creating incentives to increase banks’ risk profiles.

The Latin American countries that are members of the G20 are Argentina, Brazil and Mexico.