Basel-III norms are required to be fulfilled (though voluntary) by different countries in the banking operations on bank capital adequacy, stress testing and market liquidity norm. But in its new report, United Nations Conference on Trade and Development (UNCTAD) has come heavily against these norms. It said that countries banking in each countries need to follow prudential rules to their specific situation and needs.

“International standard and rules relating to capital requirements and liquidity under the Basel accords, which aim at reducing the risk of bank failure and the need for public bailouts by containing excessive leveraging, may not always be suited to the specific circumstances and requirements of developing countries. Relatively small banks in developing countries may require different rules than large, internationally operating banks in developed countries,” says the 149-page report.

It also suggests delinking of retail banking from investment banking. “The separation of commercial retail banking (receiving deposits, delivering loans and managing payments) from risky investment banking activities is a principle that should also guide bank regulations in developing countries. This would help prevent individual financial institutions from growing excessively large and assuming such a diversity of activities that their performance becomes systemically important,” the report says.

The study also favours a government-controlled mechanism for both public and private financial institutions. “It also needs to be recognised that it was the privatisation of public banks and the deregulation of financial systems that paved the way to major financial crises in Latin American and in East and South-East Asia. In light of these different experiences, developing countries need to carefully weigh the pros and cons of government involvement in credit allocation when shaping or reforming their domestic financial sectors,” UNCTAD says.

According to the report, countries should focus on the volume of bank credit than on money creation for promoting financial stability.

See attachment for the rull report.