The Political Economy of Bank Regulation in Developing Countries Risk and Reputation (by Oxford University Press)
The book have mainly provided a wealth of empirical evidence on the political economy dynamics that lead regulators in peripheral developing countries to converge on, and diverge from, international standards. Our case studies provide compelling evidence of the powerful reputational, competitive, and functional incentives generated by financial globalization that lead regulators to adopt international standards, even when they are ill suited to their local context. A striking finding from our case studies is that politicians and regulators were the main drivers of convergence. In the countries where implementation was most ambitious, politicians played a vital role, championing the expansion of financial services and integration into global finance as an important component of their country’s development strategy. In some cases, regulators advocated convergence on prudential grounds, concerned about the increasing risks posed by internationally active banks. But we also found evidence of strong reputational incentives to implement the latest international standards, which are considered the ‘gold standard’ in international policy circles. We explain how our findings speak to wider debates in the literature, including over the agency of actors from peripheral developing countries in the global economy; relationships between firms, politicians, and the state in developing countries; the importance of policy ideas, particularly the role of the financial sector in economic development; and the inner workings of bureaucracies in developing countries. We highlight areas for future research, including fine-grained analysis of political dynamics within government institutions in developing countries, and the trade-offs associated with independent regulatory institutions.
The book have mainly provided a wealth of empirical evidence on the political economy dynamics that lead regulators in peripheral developing countries to converge on, and diverge from, international standards.
Our case studies provide compelling evidence of the powerful reputational, competitive, and functional incentives generated by financial globalization that lead regulators to adopt international standards, even when they are ill suited to their local context. A striking finding from our case studies is that politicians and regulators were the main drivers of convergence. In the countries where implementation was most ambitious, politicians played a vital role, championing the expansion of financial services and integration into global finance as an important component of their country’s development strategy. In some cases, regulators advocated convergence on prudential grounds, concerned about the increasing risks posed by internationally active banks. But we also found evidence of strong reputational incentives to implement the latest international standards, which are considered the ‘gold standard’ in international policy circles.
We explain how our findings speak to wider debates in the literature, including over the agency of actors from peripheral developing countries in the global economy; relationships between firms, politicians, and the state in developing countries; the importance of policy ideas, particularly the role of the financial sector in economic development; and the inner workings of bureaucracies in developing countries. We highlight areas for future research, including fine-grained analysis of political dynamics within government institutions in developing countries, and the trade-offs associated with independent regulatory institutions.
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306 The Political Economy of Bank Regulation
hesitated to move forward with Basel, because implementing the standards properly
would have exposed the significant weaknesses in both private and state-owned
banks, exacerbating the crisis situation. The shift in the preferences of the
reformists and the SBV during this period effectively halted the implementation
of Basel standards. Meanwhile, the reluctance of banks, many of which were in
a difficult situation, made Basel implementation even less feasible than in the
previous period.
The third period (2014 onward) has been characterized by a return to pro-Basel
preferences. Once the crisis had passed, and the economic integration process
had regained its strong momentum, the reformist faction could again push forwards
with the implementation of international standards. The SBV wants to use
Basel standards to discipline and clean up weak banks. Moreover, many private
banks and even state-owned banks now perceive Basel standards as being im portant
for managing their liquidity, improving supervision and risk, signalling their
health, and enduring competitive pressures. Thanks to more genuine interests
from the politicians, regulators, and banks, the implementation of Basel II has
been accelerated, and some elements of Basel III such as liquidity coverage ratio
(LCR) and net stable funding ratio (NSFR) are reflected in the banking regulations
issued by the SBV.
Through an analysis of aggregate data and thirty interviews with regulators,
bankers, financial experts, and politicians in Vietnam, in this chapter we show
that Vietnam’s case is an example of conflicting preferences for Basel adoption
and implementation, particularly in the second period. The reformists rely on
Vietnam’s international commitments and opt for international standards (Basel
in particular) to reform the domestic banking sector. At the same time, interventionist
financial policies, costly implementation, the low internationalization level
of the banking sector, and the lack of competent technocrats inside both the SBV
and domestic private banks have all contributed to a high level of forbearance in
Basel implementation.
Table 13.1 Vietnam: key indicators
Vietnam
GDP per capita (current US$, 2017) 2343
Bank assets (current US$)
267.7 bn
Bank assets (% of GDP) 130.4
Stock market capitalization (% of GDP) 28.6
Credit allocation to private sector (% of GDP) 123.8
Credit allocation to government (% of GDP) 18.1
Polity IV score (2017)
−7
Note: All data is from 2016 unless otherwise indicated.
Source: FSI Database, IMF (2018); GDI Database, World Bank (2017);
Polity IV (2014)
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