Abstract
Emerging market (EM) banks differ from advanced country banks. They may be weaker in some respects but are stronger in others. Neither of these is well understood leading to inappropriate policy. Scale and cross-border exposures for banks in emerging economies are lower compared to advanced economies. The path of market development and regulatory evolution has helped reduce structural risks but some of the distinctive broad-pattern regulation used creates good incentives that could fill gaps in global regulatory reforms if more widely applied. Since markets remain thin, and interest rate spreads are high, EM banks are vulnerable to large fluctuations in policy rates. Cyclical risks can be contained as long as policy makers moderate the rates. Global regulatory reform can also reduce risks. The argument is illustrated with the Indian case.
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