Even though the impact studies and estimates of the effects were targeted at the advanced economies, they should hold for the EMSEs as well.
EMSEs with lower credit ratings could thus find their banking system with higher capital levels than in advanced economies, regardless of whether banks in the latter are more exposed to other systemic risks.
As EMSEs generally lack local infrastructure to facilitate the issuing of structured capital instruments in domestic markets, local banks are faced with difficult, if not impossible, challenges to raise less costly capital.
For example, the deduction of deferred tax assets proposed by Basel III seems to weigh relatively more in EMSEs than in advanced economies.
Difficulties associated with the deductions and eligibility criteria for Tier 1 and Tier 2 instruments under Basel III may create pressure on EMSEs to implement changes to their legal frameworks.
EMSEs may also need to take actions to cultivate domestic markets for the issuance of structured capital instruments, including: (i) having in place legal and institutional arrangements to enable the issuance of Basel III-recognized capital instruments; (ii) defining a priori criteria for the triggering of the point of non-viability, which may help boost market confidence and acceptance for issuance of structural capital instruments; (iii) having an enabling tax environment where the capital instruments issued by banks are typically tax-deductible and are not subject to withholding tax; and (iv) designing the terms of capital instruments to make such instruments suitable for a broad range of investors.
In many EMSEs that have not yet implemented Pillar 2 of Basel II, the development of supervisory judgement that is crucial for Basel II and Basel III may be lacking.
EMSEs have often been well ahead in terms of applying macroprudential logic in their policies (Hahm et al, 2012; Moreno, 2011).
3) As regards EMSEs, two issues should be highlighted.
5 thus produces significant increases in the RWA for trading exposures in the financial markets of EMSEs because they usually have greater volatility and lower global credit ratings.
This issue is very important for the development of efficient financial markets in EMSEs where global banks and their local subsidiaries are an important source of liquidity.