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Cross-border spillover effects of the G20 financial regulatory reforms: results from a pilot survey

Erik Feyen's picture

After the global financial crisis, the G20 set out on an ambitious financial regulatory reform agenda to strengthen the global financial system. With any type of regulatory framework, incentives are created. While these reforms will ultimately contribute to greater financial stability there is a risk that regulations will have unintended consequences and spillover effects by reducing the incentives to lend to countries with emerging markets and developing economies (EMDEs) where financing is critical to achieving the SGDs.

The Financial Stability Board (FSB) has been actively working to improve the evidence on any adverse effects of the post global crisis financial regulatory reforms. The World Bank works closely with the FSB to ensure the voice of developing countries are represented in these discussions. To complement the FSB’s efforts, our team conducted qualitative surveys in seven EMDEs that focused on the adverse impact of spillover effects that may take place in individual countries that are not required to implement the reforms themselves.

The surveys conducted in 2017 targeted seven countries: Bangladesh, Colombia, Kenya, Morocco, Peru, Romania, and Tanzania, that were selected based on the size of their cross-border activities, geographic dispersion and diverse characteristics of their financial sectors. Participants included senior officials at regulatory agencies, local banks, and global banks. The questions focused on the impact of the regulatory reforms relating to bank resilience (Basel III), the additional requirements on global systemically important banks (G-SIBs), and “over the counter” (OTC) derivatives.

Overall, the findings from the surveys should be interpreted with caution and regarded as preliminary. There are important caveats related both to the survey design and to the difficulty in interpreting results.

However, some of the findings suggest that the reforms may carry unintended economic and social spillover costs for individual EMDEs. In addition, while it is challenging to generalize, such costs may be higher in EMDEs that have, inter alia, higher supervisory and institutional constraints, shallower financial sectors, and higher dependence on foreign banks or other sources of foreign funding.

More work therefore remains to better understand the nature of these spillover effects, how they shape the provision of commercial financing to meet developmental objectives, and what actions can be taken to mitigate any adverse impacts.

In conclusion, while the global benefits of these reforms are expected to outweigh the costs, the impact may differ across countries—particularly for EMDEs that have sizeable financing gaps to fund development needs and that rely on commercial financing sources.

You can read about the survey and its findings here.

Spill-over effects of financial reforms and other related topics will be discussed in the upcoming Overview Course of Financial Issues of the World Bank. Click here for information about the course and how to register.