West African Economic and Monetary Union

The West African Economic and Monetary Union (WAEMU) moved to adopt Basel II and III standards in 2016 after implementing Basel I for many years. Given the weak development of the financial sector in the Union and its poor connectedness to the international financial system, this reform was unexpected. The adoption of Basel standards has been championed by the Central Bank of West African States (BCEAO), under the influence of the IMF, which has strongly encouraged implementation. National governments and domestically oriented banks have not played an active role, complicating the implementation and enforcement of the new regulations. The central bank is embedded in regulatory peer networks, has close links with the IMF, and is insulated from domestic political pressure because of its supranational position.

Nigeria

In Nigeria regulators have gradually adopted Basel I, II, and III, although implementation and enforcement have been slow. The impetus for Basel adoption has come primarily from regulators, who are embedded in international policy networks. They consider Basel II and III the most appropriate set of regulatory standards to stabilize and manage risk in Nigeria’s large, internationalized banking sector. While Basel adoption was not a salient issue among Nigeria’s politicians, Nigeria’s large internationally active banks welcomed the implementation of Basel II as an important means to enhance their competitiveness and signal soundness to markets. These banks play an important role in providing employment and access to finance for the private sector, and their resolution would meet with resistance from politicians and lead to a loss of confidence in Nigeria’s banking sector.

Ghana

In Ghana the stop-start dynamics of Basel implementation reflects party politics. Moves to implement Basel and other international standards have coincided with periods when the New Patriotic Party (NPP) has been in office. The NPP has a vision for positioning Ghana as a financial services hub for West Africa and strong ideological and material connections to international finance. In 2017 the NPP government embarked on a radical reform of the banking sector, implementing major elements of Basel II and III and catapulting Ghana to among the most ambitious implementers of Basel standards among our case study countries. In contrast, the National Democratic Congress (NDC) focused on directing finance to the productive sectors of the economy and supporting indigenous banks, and the implementation of international standards was not a policy priority during their periods in office.

Pakistan

Pakistan has the highest level of implementation among our case study countries. The impetus for converging on international standards has come from different actors over time. The adoption of Basel I adoption in the 1980s was driven by the World Bank and IMF. In the 1990s and early 2000s, the adoption of Basel II was driven first by politicians promoting the expansion of financial services, and then by banking sector regulators. Most recently, as banks have internationalized, they have championed the implementation of Basel III. Pakistan is one of the few cases where all three major actors—politicians, regulators, and major banks—are now aligned behind the implementation of the standards, leading to a high and ambitious level of implementation.

The Puzzle

This chapter sets out the puzzle at the heart of this book: why do governments in many developing countries choose to regulate their banks on the basis of international standards they did not design, and which are costly to implement? Country case studies across Africa, Asia, and Latin America provide compelling evidence of the reputational, competitive, and functional incentives generated by financial globalization that lead regulators to adopt international standards. The chapter summarizes the book’s core argument about the channels of regulatory interdependence between countries in the core and periphery of the global financial system, and the conditions under which we find that regulators to converge on, or diverge from, international banking standards.

Vietnam

The implementation of international banking standards in Vietnam has been the subject of contestation between reformist and conservative factions within the governing political party. In any given period, the speed of implementation has been affected by which of these factions dominates regulatory decision-making. The adoption and implementation of Basel standards in Vietnam has gone through three distinctive periods: from 1999–2006, the reformist faction pursued international regulations in order to discipline state-owned banks and improve the functioning of the financial sector. From 2006–13, the central bank (SBV) formally adopted Basel II but a domestic banking crisis effectively halted implementation. More recently there has been a return to pro-Basel preferences. However, interventionist financial policies, high implementation costs, 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 regulatory forbearance.

Ethiopia

Ethiopia has chosen to diverge from international standards and not to adopt any aspect of Basel II or III. Ethiopia has the least internationalized banking sector among our case countries. Despite significant exposure to the Basel standards through donors and the IMF, banking supervisors at the National Bank of Ethiopia (NBE) have little use for Basel II and III. Ethiopia’s decision to diverge from the international Basel framework results from a strong preference for political control over the financial industry. The Ethiopian government seeks to emulate the example of East Asian ‘tiger’ economies, for whom financial repression was a key tool in the pursuit of rapid industrialization. However, as Ethiopia’s domestic banks struggle to sustain transformative growth, pressures for greater financial openness (and, by extension, for increased regulatory convergence) are beginning to mount.

Angola

As in other resource-rich countries, the financial sector in Angola plays a key role in facilitating outgoing financial flows. The political allocation of credit and issuing of bank licenses to insiders have been an important avenue for securing support for the regime. The result has been strong opposition to the ratcheting-up of bank regulation and supervision. Yet a balance-of-payments crisis in 2009, falling in oil prices from 2014, and changes in the global regulatory environment together meant that divergence from international standards was no longer an option. For Angolan banks to maintain their links to the global financial market, the country needed to signal its readiness to regulate the sector in line with international standards. Nonetheless, because the politicized nature of the banking sector has not changed, standards are either not implemented or are implemented but not enforced, leading to a situation of ‘mock compliance’.

Kenya

In Kenya the impetus for Basel implementation has come from the regulator, the Central Bank of Kenya (CBK), which is highly independent, has strong links to international policy networks, and is very receptive to international policy ideas. Since 2003, the incumbent politicians have also been keen to adopt the latest international standards in order to attract investment into Kenya’s financial sector. Meanwhile, as the banking sector is relatively well capitalized, there has been little opposition from banks, with some international and large local banks being mildly in favour of Basel II and III adoption. In the Kenyan case the regulator has been the driving force for Basel adoption, supported by internationally oriented politicians and banks.

Bolivia

Bolivia had ambitious plans to implement Basel standards, but these only partly came to fruition. A novel financial services law promulgated by the regulator in 2013 established the legal framework for a wholesale adoption of Basel II, including internal ratings-based components, and elements of Basel III. It is puzzling to see such a wholehearted embrace of Basel standards by a domestically oriented left-wing government that follows a heterodox approach to economic policymaking. Basel adoption has been driven by a regulatory agency embedded in transnational technocratic regulators networks and seeks to implement international standards. Bolivian regulators wrote a range of Basel rules into the draft legislation. But Bolivian politicians, prioritizing the goals of financial stability and inclusive growth, grafted onto this legislation significant interventionist policies. Thus, Bolivia’s Basel adoption is pulling in two directions: adherence to Basel Committee-style best practices and, concurrently, financial interventionism to stimulate economic growth and financial inclusion.