Regulatory supervision of fast-growing banks in emerging markets has improved significantly over the past 20 years, but oversight must get stronger still says Fitch Ratings in a new report.
The rating agency reports that, over the last 20 years, emerging market banking regulation has improved, largely in an effort to avoid a repeat of past financial crises that jeopardized economic growth, and the health of the banks.
It notes that more conservative capital rules have been established across most emerging market banking systems, and that “compliance and accounting-oriented supervision techniques are giving way to risk-based frameworks that more closely mirror developed market regulatory approaches.” Most emerging market regulators are pushing banks’ average Tier 1 capital ratios above 10%, it says.
Additionally, foreign currency regulations have been tightened, and related-party transactions are becoming less frequent as disclosure improves, it notes. Moreover, domestic regulators have been given more legal authority to carry out bank supervision, it says.
That said, Fitch stresses that not all emerging market bank regulatory frameworks are equally robust, and it says the need for tougher supervision is growing, “as banks’ retail exposure expands, introducing new risk management problems.”
And, as emerging market banks continue to expand internationally, Fitch says that the need for enhanced regulatory harmonization within regions will increase. “Banking regulators must quickly attempt to reduce regulatory asymmetries in order to cope with the already significant and growing regionalization of emerging market banks,” it says.
Moreover, Fitch stresses that, while the banks generally have 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,” it says.