Implementing Basel Framework's Transparency Requirements in Emerging Countries: Bane or Boon?

Abstract

Transparency requirements are central to the third pillar of the Basel prescriptions. The purpose of this article is to offer a simple theoretical model to analyze the impact of regulatory requirements for transparency on the balance sheet and profits of banks, focusing on the implementation of Basel’s requirements in emerging countries. We show how an increased transparency, which implies a rise in associated costs, especially operating costs, may result in lower profits for banks despite a reduced capital requirement. We also show the conditions under which these reduced profits occur, and in this respect what the consequences of the strengthened capital requirements introduced by Basel, in its third incarnation, are likely to be. We finally show that implementing Basel framework can have ambiguous effects in emerging countries, depending on parameters’ values.