Global Banking Rules Are Failing Emerging Markets

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1. In a piece for *Project Syndicate* coauthored with Vera Songwe of the Brookings Institution, Senior Fellow [Peter Blair Henry](https://www.hoover.org/profiles/peter-blair-henry) and Distinguished Visiting Fellow [Jendayi Frazer](https://www.hoover.org/profiles/jendayi-frazer) argue that while the Basel III international regulatory framework for banks has “played a crucial role in preventing another systemic collapse” since its inception in the wake of the 2008 financial crisis, it has also created “regulatory barriers that hinder the efficient deployment of capital to emerging markets and developing economies.” Noting the urgent need to deploy more private capital to these economies to finance development, health, and education, the authors propose four core reforms to the Basel III framework designed to “align regulation with actual risk.” As they conclude, implementation of these reforms by G20 nations would “crowd in more private investment, reduce borrowing costs for developing countries, and accelerate progress toward transformative development that creates much-needed jobs.”

2. The article makes a fundamental mistake – they come so close to seeing it but fail to put two and two together.

   > In fact, the data suggest that by year five, the marginal default rates for development loans are lower than those for corporate loans extended to investment-grade borrowers. But despite the lower risk profile, banks are required to hold more capital against development-finance loans than they do against loans to unrated companies over the life of the project.

   > Insurers encounter similar regulatory barriers. Under the European Union’s Solvency II framework, an insurer investing in an EMDE infrastructure project faces a capital charge of 49% – nearly double the 25% required for a comparable project in an OECD country. Yet there is no empirical justification for this unequal treatment. Historical data show that infrastructure loans in EMDEs perform just as well as those in advanced economies.

   They almost get it with the following:

   > The significantly higher capital costs that banks incur when making infrastructure loans to EMDEs deter them from supporting transformative, high-impact projects, **steering capital toward safer, low-impact investments.**

   I.e., the low default rates are a *result* of the regulatory framework that the authors want to rework – using the outcomes of the regulation as justification for changing the regulation itself.

   There may be a good argument for easing this regulatory framework. The authors didn’t make that argument.

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