INTERVIEW - Basel can help Latam avert boom-bust cycles - W.Bank

MIAMI Tue Sep 14, 2010 6:38am IST

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MIAMI (Reuters) - New bank capital rules agreed by global regulators are positive for Latin America, where governments like banks need to better prepare for future downturns that may follow the current commodities-led economic recovery, a senior World Bank economist said on Monday.

Augusto de la Torre, chief economist for Latin America and the Caribbean, said the Basel III requirements agreed on Sunday were "good for Latin America" because they sought the same kind of prudent long-term safety provisions for banks that could also be applied by governments in their economic policies.

"I see it as positive, I see it as necessary and it will be helpful overall," de la Torre told Reuters in an interview.

He spoke after presenting a World Bank report highlighting how flourishing commodities exports to emerging Asian economies like China are giving Latin America more resilience and strength to rebound from the recent global economic crisis.

The Basel III rules mean banks will have to hold far more capital to make them more resistant to financial shocks. They will demand that banks hold top-quality capital totaling 7 percent of their risk-bearing assets, against the present requirement of 2 percent.

De la Torre said that on the same principle, governments of major Latin American commodity exporters, whether of farm goods, minerals or hydrocarbons, should look to wisely use the revenue windfalls provided by high prices to boost long-term savings and shore up and diversify their fiscal revenue bases.

"There is a cycle, and we have learned over time that in the good parts of the cycle, institutions and markets tend to underprice risk, so they hold less capital than what they need because they are underestimating risk," he said.

"And then when the cycle turns down, all these risks come up like dead fishes in the water and then they find themselves with insufficient capital to buffer those risks," he added.

De la Torre said prudent use of windfall export revenues would help Latin American resources exporters to escape from the past damaging "boom and bust" cycles that had long marked the region's volatile dependence on raw materials exports.

"It's not the time for complacency -- this recovery needs to be sustained with appropriate good policies," he said in an news conference in Miami before the interview.

"NOT WITHOUT STRESS"

De la Torre predicted in May that Latin America would post economic growth this year of 4.5 percent, up from an earlier forecast of 4 percent.

In Miami, he singled out some countries like Chile which had already provided an example of how to save and conserve commodity export revenues earned during good times, to be able to better the weather the economic downturn when it came.

In contrast, Venezuela was currently lagging other Latin American countries in pulling out of the crisis, precisely because it did not appear to have transformed its oil windfall of past years into long-term savings or productive investment.

"Countries need to build savings in the good times, because they will have to invest them and use them in the bad times," de la Torre told Reuters.

He predicted the application of the Basel III rules in Latin America would be "not without stress" as some would argue that the additional regulations would inhibit banking and financial activity.

But he recalled that since the 1990s, Latin America, wary of endless successive financial crises, had developed more conservative banking regulations which had helped the region to better resist fallout from the recent global downturn.

"So we learned the hard way ... in Latin America the capital buffers are bigger, the provision buffers are bigger, the restrictions on how you can play around with other people's money are bigger," the World Bank economist said.

But he added the Basel III reforms would need to consistently applied across the globe.

"Because if it is not applied consistently, regulatory arbitrage will happen across borders and transactions will shift to the places where the regulations are the weakest, and that will distort again the stability of the international financial system," de la Torre said.

(Editing by Andrew Hay)

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