The turmoil in financial markets that resulted from the 2007 subprime mortgage crisis in the United States indicates the need to dramatically transform regulation and supervision of financial institutions.

Would these institutions have been sounder if the 2004 Revised Framework on International Convergence of Capital Measurement and Capital Standards (Basel II accord)—negotiated between 1999 and 2004—had already been fully implemented? Basel II represents a dramatic change in capital regulation of large banks in the countries represented on the Basel Committee on Banking Supervision: Its internal ratings–based approaches to capital regulation will allow large banks to use their own credit risk models to set minimum capital requirements.

The Basel Committee itself implicitly acknowledged in spring 2008 that the revised framework would not have been adequate to contain the risks exposed by the subprime crisis and needed strengthening.

This crisis has highlighted two more basic questions about Basel II: One, is the method of capital regulation incorporated in the revised framework fundamentally misguided? Two, even if the basic Basel II approach has promise as a paradigm for domestic regulation, is the effort at extensive international harmonization of capital rules and supervisory practice useful and appropriate?

In this book, Daniel Tarullo provides extended and, on balance, reasonably negative answers to both questions. His criticisms of the Basel II approach relate directly to the onset of the financial crisis last year and have broader implications for reforming the regulation of large financial institutions. He first assesses the effectiveness of Basel II as a model for domestic capital regulation, focusing on the advanced internal ratings–based (A-IRB) approach—the fundamental innovation of Basel II that most large multinational banks will adopt to calculate capital requirements.

While Tarullo lauds the two core aims of Basel II—to align capital requirements more closely with the risks actually assumed by banks and to continuously prompt banks to adopt the best-available risk management practices— as being absolutely desirable, he questions the potential of the Basel II A-IRB proposal to achieve those aims.

He examines the potential advantages of the IRB approaches—greater risk sensitivity, the prod given to large and complex banks to improve their internal risk management systems, and the creation of a “common language” of risk profiles to assist supervisors and market actors in their evaluation of banks—and concludes that numerous problems, including the unproven character of internal ratings assessments and the administrative difficulties in monitoring bank implementation of IRB requirements, raise significant doubts that these advantages will be realized.

Visit Banking on Basel: The Future of International Financial Regulation Download Page

You can download the publication in PDF format. FREE.

Paperback: 324 pages
Author: Daniel K. Tarullo
Publisher: Peterson Institute; 1 edition (November 2008)
Language: English
ISBN-10: 088132423X
ISBN-13: 978-0881324235

About Daniel K. Tarullo

Daniel K. Tarullo is Professor of Law at Georgetown University Law Center. He was a visiting Professor of Law at Harvard Law School (2005) and the Frederick H. Schultz Professor of International Economic Policy at Princeton University (2004).

Tarullo held several senior positions in the Clinton administration, ultimately as Assistant to the President for International Economic Policy, responsible for oordinating the international economic policy of the administration. He was a principal on the National Economic Council and the National Security Council. Prior to that, he had been Deputy Assistant to the President for Economic Policy, with special responsibility for regulatory and international issues.

Visit The Basel Committee on Banking Supervision Website

The Basel Committee on Banking Supervision provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. It seeks to do so by exchanging information on national supervisory issues, approaches and techniques, with a view to promoting common understanding. At times, the Committee uses this common understanding to develop guidelines and supervisory standards in areas where they are considered desirable. In this regard, the Committee is best known for its international standards on capital adequacy; the Core Principles for Effective Banking Supervision; and the Concordat on cross-border banking supervision.

The Committee's members come from Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden, Switzerland, the United Kingdom and the United States. Countries are represented by their central bank and also by the authority with formal responsibility for the prudential supervision of banking business where this is not the central bank. The present Chairman of the Committee is Mr Nout Wellink, President of the Netherlands Bank.

The Committee encourages contacts and cooperation among its members and other banking supervisory authorities. It circulates to supervisors throughout the world both published and unpublished papers providing guidance on banking supervisory matters. Contacts have been further strengthened by an International Conference of Banking Supervisors (ICBS) which takes place every two years.

The Committee's Secretariat is located at the Bank for International Settlements in Basel, Switzerland, and is staffed mainly by professional supervisors on temporary secondment from member institutions. In addition to undertaking the secretarial work for the Committee and its many expert sub-committees, it stands ready to give advice to supervisory authorities in all countries. Mr Stefan Walter is the Secretary General of the Basel Committee.

Comments (0)

Name

Email

Comment

smaller | bigger

Add Comment