IPD AI Insights

Basel II and Developing Countries

12/01/2002
Network Papers

This paper will present the results of empirical work that we have undertaken to address the first point detailed above. We suggested in our most recent paper on this subject that one reason why capital requirements under the new proposals could be inappropriately high for developing and emerging economies, is that the benefits of international diversification are not taken into account.

We suggested that, if it could be demonstrated that the correlation between developed/developed country lending was higher than that between developed/developing, then a case could be made that an internationally diversified loan portfolio, with a range of developed and developing country borrowers, would have a lower level of risk – in terms of the overall portfolio – than one which focused primarily on developed country lending. If this is, in fact, the case, then it would be possible – and certainly desirable – for the Basel Committee to incorporate the benefits of international diversification into the new Accord.