Macro and Sectoral Impacts of Basel III Implementation for Developing Countries

With Basel III implementation underway, several studies have been done on the effects of these rules on sovereign risk for developed economies; however, little has been produced that covers developing countries. Insight into this neglected topic is of substantial interest to the Sovereign Risk Group at Moody’s and thus is the objective of the Capstone project. The focus was on producing a report detailing the impact of Basel II-III rules in developing economies, specifically analyzing the effects on both the financial/banking industry and GDP.

The study aimed to determine the impact of increased capital ratios on lending spreads. This information helped analyze how banks’ response to these more stringent guidelines influences not only the financial industry as a whole but also GDP growth as a reflection of the country’s macroeconomic health.

Based on these findings, the team built a simple cost benefit model that may be applicable to other major developing economies not yet researched by our client. Countries that were examined included Brazil, China, India, Mexico, Nigeria, Ukraine, Russia, and South Africa all of which figure as proxies for their respective regions.