The newly released capital adequacy framework will undoubtedly challenge the operations of banks, most directly by imposing new transaction costs on them and other similar financial institutions. There is, however, an asymmetry in existing capital adequacy standards of measurement across different banking systems. Low income economies, with already fragile banking and capital markets institutions, are likely to face the greatest challenges in meeting the exacting demands required by the Basel II framework. Some developing countries, notably India, have comparatively well-developed banking institutions and regulatory monitoring structures and are over the long run likely to emerge unscathed in adapting to the new capital adequacy framework.
As I recently argued in my book, Banking Reform in India and China (Palgrave 2004), India’s banking system has had a legacy of relative transparency involving the operations of banking institutions. Like many other emerging markets and transition economies, India’s banking system continues to have large state involvement. For instance, in 1990, among public sector banks, the State Bank of India (SBI) and its affiliates, together with 19 nationalized banks and other scheduled commercial banks dominated bank holdings. In 1990, prior to India’s undertaking of economic liberalization, extremely limited participation was permitted to 24 small private commercial banks and 19 foreign banks. |
