The Impact of Basel III on Emerging Economies

This research constructs a two-stage model to gauge the impact of Basel III on GDP growth rates in 47 emerging market economies (EMEs). The first stage detects a strong relationship between compliance with Basel III capital, liquidity and leverage ratios on the one hand and credit performance on the other hand. The second stage uses multiple regression analysis to estimate the direct and the indirect transmission effects. The results reveal that implementing Basel III would hamper growth by more than 3 percentage points, and that the recovery period from the shock requires 3 years and 3 quarters. Advanced EMEs are the most adversely impacted in comparison to secondary and frontier emerging markets. The paper concludes by proposing a set of recommendations and reforms at various levels: the Basle Committee for Banking Supervision, domestic regulators, national and regional trade unions of banks, and individual banking institutions.