Anita Angelovska-Bezoska: Financial regulation, implementation and transition effects on emerging market economies Speech by Ms Anita Angelovska-Bezoska, Vice-Governor of the National Bank of the Republic of Macedonia, at the Fourth OMFIF Main Meeting in Europe, Ankara, 5–6 September 2013. *  *  *  Special thanks for the preparation of the background note to Ana Mitreska, Monetary Policy and Research Department and Natasa Andreeva, Financial Stability and Banking Regulation Department. Mihajlo Vaskov and Ljupka Georgievska also contributed to the drafting of the Note. Background note prepared for the participation of the Vice Governor Anita Angelovska Bezoska at the Fourth OMFIF Main Meeting in Europe, Ankara, Turkey, 5–6 September 2013. Since the onset of the global financial crisis the financial regulatory overhaul has been put high on the policy agenda with the aim of increasing the resilience of the banking system and thus promoting global financial stability. Stronger banking system will be better placed to absorb financial or economic shocks and prevent transmission of these shocks to real economy. The regulatory reform basically addresses the lessons learned from the crisis that insufficient capital and liquidity buffers, non-adequate on and off-balance sheet risk coverage and excessive leverage can undermine the stability of the financial system leading to contraction of the economic activity that can further aggravate the financial instability and require public sector intervention to avoid full-blown banking crisis. In this vein the reform will undoubtedly contribute to creating more sound and resilient banking system that is a key for sustainable growth.

– The new capital requirements require balance sheet rebalancing of internationally active banks, i.e., increase of the capital or reduction in risk weighted assets. Given the still slow recovery process that would be an obstacle for faster increase of capital (through reinvested earnings or new capital injections) this may have implications for the availability of finance. One related issue is the exclusion of minority stakes from consolidated group capital and its implications for the process of deleverage as well as for the development and liquidity of local equity markets (change in the nature of acquisitions). – “Retrenchment in specialty finance due to higher risk weights for certain finance instruments would be particularly harmful to the growth outlook of the region. Some of the sectors most exposed to the retrenchment process are specialty finance lines, particularly infrastructure finance and trade finance. Infrastructure finance is characterized by long maturities, heavy use of syndication, and dependence on long-term dollar funding that makes it particularly exposed to deleveraging” – Cost of finance – “The cost of finance in the region could increase due to inherent inconsistencies in the treatment of sovereign exposures at the solo and consolidated levels. Host supervisors typically apply low risk-weighting for exposures to the host sovereign. However under the forthcoming set of EU regulations, higher risk weights on these exposures could result in a higher cost of finance in the host jurisdiction”. The second channel of transmission is related to the Basel III liquidity framework.