Global Financial Governance Confronts the Rising Powers by Henning C. Randall;Walter Andrew;

Author:Henning, C. Randall;Walter, Andrew;
Language: eng
Format: epub
Publisher: Centre for International Governance Innovation, The

The BCBS Agenda and EMDE Interests

Until 2009, emerging and developing countries generally had been excluded from substantive participation in BCBS negotiations, which the Group of Ten countries had dominated almost exclusively since the mid-1970s. Even within this narrow grouping, a small number of developed countries with large financial centres were especially influential, including the United States, the United Kingdom, Japan, Germany and France (Goodhart 2011; Singer 2007). In spite of the narrowness of this grouping and the voluntary status of the standards it issued, the BCBS increasingly set the global framework for the regulation of “internationally active” banks, even if there were national variations on specific aspects. One important effect of this process was that it also promoted a degree of global convergence in the regulation of non-internationally active banks. By the mid-1990s, over 90 percent of countries in the world claimed to have adopted the “Basel I” capital adequacy framework of 1988 and most of these signalled that they would also adopt the “Basel II” revised framework of 2004 (Čihák et al. 2012). The official and market pressure on emerging economies experiencing deep banking crises — countries whose regulatory credibility was most in doubt — to adopt Basel and related standards increased substantially over the 1990s and early 2000s (Walter 2008). Analogous to the way in which countries with low monetary policy credibility sought to “tie their hands” by pegging their exchange rate to a high credibility country (Giavazzi and Pagano 1988), visible adoption of Basel standards in many EMDEs was attractive precisely because they were set by a small committee of advanced country authorities associated with regulatory best practice.

The problem with this strategy of importing regulatory credibility was twofold. First, because the standards set by the BCBS were often of a general nature there was considerable scope for national discretion in implementation, which reduced the credibility gains of adoption for EMDEs. However, as more countries adopted Basel standards it was even worse to be seen as a laggard, so the incentives to converge remained strong. Second, in regulation it is perhaps even less likely than in monetary policy that “one size will fit all.” The focus of BCBS discussions from the beginning was on internationally active banks, the great majority of which are from developed countries. Over time, the Basel capital adequacy regime was modified to take increasing account of trading-related activities and securities markets, which were of primary interest to the largest and most sophisticated international banks. This began in the Market Risk Amendment of 1996 and culminated in Basel II. In its “standardized approach” to the measurement of risk-weighted assets, Basel II offered a different set of standards for less sophisticated banks and jurisdictions, but by providing advantages to banks adopting the more advanced internal risk-based approaches it signalled where its priorities lay.

This gap between the interests of EMDEs and the priorities of the BCBS was only sustainable while the latter’s standards enjoyed the reputation of reflecting regulatory best practice. When the GFC undermined this reputation,

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