THE PRO-CYCLICAL IMPACT OF BASLE II ON EMERGING MARKETS AND ITS POLITICAL ECONOMY

Abstract

One of the most important institutional frameworks is the national and international regulatory regime for banking. The role of banks went through a period of neglect in the late 1990s, when storming equity markets provided much of the new money flowing to big business, especially in the developed economies. But, now as then, most businesses and entrepreneurs are too small to raise money on the stock market and most depend on bank finance. A wellfunctioning banking system is essential to economic growth. This is even more the case in developing countries with underdeveloped financial markets (see Singh, 1997). Japan may have the second largest stock market in the world but a wrecked banking system has strangled economic growth. In industrial and emerging economies, stock markets are not substitutes for banks; we need them both.

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