Basel II and Developing Countries: Diversification and Portfolio Effects.

Abstract

This paper presents the results of empirical work undertaken to consider the concern that widespread adoption of the IRB approach by internationally active banks would lead to a significant increase (decrease) in capital requirements for loans to lower (higher) rated borrowers. To the extent that the pricing and availability of international bank loans is influenced by the capital requirements that relate to them, this would imply a sharp increase in the cost and/or a reduction in the quantity of international lending to developing and emerging economies. Given the current very low levels of such lending, this raises the possibility of the current situation becoming 'institutionalised', so that, even if global conditions improve, the potential of international bank lending to contribute towards the development of poorer countries would be significantly reduced.

Citation

22 pp.

Basel II and Developing Countries: Diversification and Portfolio Effects.

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