TEXT - Fitch says strengthened EM bank supervision positive

Fri Feb 22, 2013 10:10am EST

Feb 22 - Regulatory supervision of rapidly growing banks in emerging market
(EM) economies has improved markedly over the past two decades, but the
constantly evolving nature of business and regulatory trends in developed
markets requires further strengthening of EM banking regulation. Fitch Ratings
believes that banking regulators must quickly attempt to reduce regulatory
asymmetries in order to cope with the already significant and growing 
regionalization of EM banks.

Many EM countries have reported improving credit quality in recent years, and 
sovereign ratings have increasingly migrated into the investment-grade arena. In
addition, solid loan growth has paved the way for deeper banking concentration 
in those economies. As a result, the EM banking world is much healthier than in 
the 1990s.

Over the last 20 years, EM banking regulation has improved, in large part, as a 
result of a need to avoid a repeat of past financial crises that jeopardized the
growth of emerging economies and the health of their banks. In particular, more 
conservative capital rules have been established across most EM banking systems,
and compliance and accounting-oriented supervision techniques are giving way to 
risk-based frameworks that more closely mirror developed market regulatory 
approaches.

In addition, foreign currency regulations have been tightened (more so in Latin 
America and EM Asia than emerging Europe) and related-party transactions are 
becoming less frequent as disclosure improves. In many EM systems, domestic 
regulators have been given more legal authority to carry out bank supervision.

Still, not all EM bank regulatory frameworks are equally robust, and the need 
for tougher supervision is growing, as banks' retail exposure expands, 
introducing new risk management problems. Further, as EM banks continue to 
expand internationally, the need for enhanced regulatory harmonization within 
regions will increase.

Compliance with the Basel III capital regulation framework does not pose an 
imminent threat to most EM banks due to their generally healthy capital 
positions. Most EM systems are pushing banks' average Tier 1 capital ratios 
above 10%. But definitions of capital and risk-weighted assets differ 
significantly between countries, and macro pressures could slow the 
implementation of Basel III standards in EM banking systems.

However, despite currently healthy capital positions there is no room for 
complacency. We believe banks should strive jointly with regulators to preserve 
and enhance such capital in order to properly fund expected expansion while 
maintaining enough capital to cover unexpected losses.

Many of these themes will be discussed in greater detail in Fitch's upcoming 
presentation at the J.P.Morgan Emerging Markets Corporate Conference in Miami on
Feb. 26, 2013

For a comprehensive review of Fitch's outlooks for banking sectors around the 
world, including emerging economies, see "Global Financial Institutions 2013 
Outlooks Compendium," dated Feb. 13, 2013.
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