Recent Developments in Regulation in the Light of the Global Financial Crisis: Implications for Developing Countries

Abstract

Prior to the financial crisis, the global financial system failed to fulfill its two main purposes: managing risk and efficiently allocating capital. Many emerging market banks did not have significant exposure to “toxic assets”, and were better able to withstand the financial market crisis than banks in industrialized countries. Some countries, such as Brazil, imposed restrictions on derivatives and naked short selling prior to the crisis, and instituted reserve requirements well in excess of Basel 2 minimums. (See UN, 2010.) Nonetheless, as markets continue to develop, financial institutions in middle income countries are becoming more exposed to the types of risks that hobbled the global financial system. Furthermore, in many middle income countries much of the assets of the financial system have traditionally gone into government paper rather than lending to the real economy, whereas access to credit to small and medium sized enterprises (SMEs) is necessary for sustained economic growth and development. The challenge for emerging market and middle income policymakers is to