Financial Regulation and Capital Flows to EMDEs

Emerging Markets and Developing Economies (EMDEs) rely heavily on capital flows to build the productive capacity necessary for growth. Among the drivers of such capital flows are financial regulations adopted by Advanced Economies (AEs) and applied globally through the bodies responsible for implementing the international financial architecture.

The MOBILIST-commissioned research report, “Financial Regulation and Capital Flows to EMDEs”, provides an overview of several cases where AE regulations appear to penalise EMDEs or are where policy and regulations are incommensurate with the actual risk of EMDE assets. 

The issues examined are:

(i) Treatment of EM securities in FRTB
(ii) Impact on EM infrastructure loans of insurer prudential capital rules
(iii) Effect of MiFID II research rules on Emerging Market (EM) investment research
(iv) Regulatory constraints on EM production of Voluntary Carbon Credits (VCCs)
(v) Restrictions on the use of local Credit Ratings Agencies (CRAs)
(vi) Effects on bank activity in EM securities markets from capital consolidation rules
(vii) Impacts on Correspondent Banking in EMDEs of Anti Money Laundering(AML) and Know Your Customer (KYC) rules.

The report provides preliminary thoughts on what could be done to mitigate the problems identified and describes the architecture of regulatory policy decision-making outlined above. Its findings confirm that regulatory design and decision-making are the domain of a small number of AE countries. This means that EMDEs are typically takers and not makers of policies and regulations that profoundly affect international capital flows to their economies and their prospects for domestic market development.

The subsequent MOBILIST Policy Note on Global Financial Regulation provides an overview of some of these instances where EMDEs assets are penalised through unduly conservative capital market regulations and discusses the policy implications. Global and AE regulatory standards must retain prudence and conservatism while considering the consequences for EMDEs. MOBILIST believes that delivering this shift requires more than representation but also transparency and accountability over how standards are set and calibrated, and partnership between AEs and EMDEs on policymaking.