Fitch: Strengthened EM Bank Supervision Positive; More Required

CHICAGO--()--Regulatory supervision of rapidly growing banks in emerging market (EM) economies has improved markedly over the past two decades, but the constantly evolving nature of business and regulatory trends in developed markets requires further strengthening of EM banking regulation. Fitch Ratings believes that banking regulators must quickly attempt to reduce regulatory asymmetries in order to cope with the already significant and growing regionalization of EM banks.

Many EM countries have reported improving credit quality in recent years, and sovereign ratings have increasingly migrated into the investment-grade arena. In addition, solid loan growth has paved the way for deeper banking concentration in those economies. As a result, the EM banking world is much healthier than in the 1990s.

Over the last 20 years, EM banking regulation has improved, in large part, as a result of a need to avoid a repeat of past financial crises that jeopardized the growth of emerging economies and the health of their banks. In particular, more conservative capital rules have been established across most EM banking systems, and compliance and accounting-oriented supervision techniques are giving way to risk-based frameworks that more closely mirror developed market regulatory approaches.

In addition, foreign currency regulations have been tightened (more so in Latin America and EM Asia than emerging Europe) and related-party transactions are becoming less frequent as disclosure improves. In many EM systems, domestic regulators have been given more legal authority to carry out bank supervision.

Still, not all EM bank regulatory frameworks are equally robust, and the need for tougher supervision is growing, as banks' retail exposure expands, introducing new risk management problems. Further, as EM banks continue to expand internationally, the need for enhanced regulatory harmonization within regions will increase.

Compliance with the Basel III capital regulation framework does not pose an imminent threat to most EM banks due to their generally healthy capital positions. Most EM systems are pushing banks' average Tier 1 capital ratios above 10%. But definitions of capital and risk-weighted assets differ significantly between countries, and macro pressures could slow the implementation of Basel III standards in EM banking systems.

However, despite currently healthy capital positions there is no room for complacency. We believe banks should strive jointly with regulators to preserve and enhance such capital in order to properly fund expected expansion while maintaining enough capital to cover unexpected losses.

Many of these themes will be discussed in greater detail in Fitch's upcoming presentation at the J.P.Morgan Emerging Markets Corporate Conference in Miami on Feb. 26, 2013

For a comprehensive review of Fitch's outlooks for banking sectors around the world, including emerging economies, see "Global Financial Institutions 2013 Outlooks Compendium," dated Feb. 13, 2013.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Applicable Criteria and Related Research:

Global Financial Institutions 2013 Outlooks Compendium

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=701132

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Latin American Financial Institutions
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