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Capital Market Liberalization and Development$
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José Antonio Ocampo and Joseph E. Stiglitz

Print publication date: 2008

Print ISBN-13: 9780199230587

Published to Oxford Scholarship Online: May 2008

DOI: 10.1093/acprof:oso/9780199230587.001.0001

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The Pro‐Cyclical Impact of Basel II on Emerging Markets and its Political Economy

The Pro‐Cyclical Impact of Basel II on Emerging Markets and its Political Economy

Chapter:
(p.262) 10 The Pro‐Cyclical Impact of Basel II on Emerging Markets and its Political Economy
Source:
Capital Market Liberalization and Development
Author(s):

Stephany Griffith‐Jones

Avinash Persaud

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199230587.003.0010

This chapter stresses the importance of banking regulations — and of a well functioning banking system — for economic growth. It examines both positive and problematic features of Basel II, the new international banking regulation. The concerns include the overestimation of risk of international bank lending to developing countries, as clear benefits of international diversification are not included. This creates a risk that international bank lending to developing countries could be sharply reduced and remaining lending could see its cost increased. The second concern is that it would accentuate the pro-cyclicality of bank lending, damaging all economies, but especially the more fragile developing ones. The chapter concludes with concrete policy proposals which could avoid these negative effects, such as introducing diversification benefits into Basle II and encouraging forward-looking provisioning to counter-act pro-cyclical effects.

Keywords:   banking regulation, pro-cyclicality, bank lending, economic growth, policy proposals

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