Basel II and Developing Countries : Sailing through the Sea of Standards

Despite recently announced delays, Basel II - the new standard for bank capital - is due to be completed this year for implementation in the 13 Basel Committee member countries by the end of 2006. Should the other 170 plus member countries of the World Bank also adopt Basel II? Basel II was not written with developing countries in mind, but that does not necessarily mean that there is nothing in it for developing countries or that it can be ignored. Basels I and II represent a wide Sea of Standards. This paper suggests five alternative island-standards and five navigational tools to help countries choose their preferred island within the sea. It is suggested that for some developing countries the standardized approach will yield little in terms of linking regulatory capital to risk, but that countries may need many years of work to adopt the more advanced internal rating-based approach. The paper then proposes a centralized rating-based approach as a transition measure. The paper also makes proposals regarding a set of largely unresolved cross-border issues.