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We compare various bank capital regulation regimes using a dynamic equilibrium model of relationship lending in which banks are unable to access the equity markets every period and the business cycle determines loans' probabilities of default. Banks hold endogenous capital buffers as a precaution against shocks that impair their future lending capacity. We find that Basel II is more procyclical than Basel I but makes banks safer, and it is generally superior in welfare terms. For high social costs of bank failure, the optimal capital requirements are higher but less cyclically varying, like those currently targeted by Basel III.

It is now clear that Basel III, a much discussed set of proposals to govern the international banking system drawn up by the Basel Committee on Banking Supervision, has fallen far short of its creators' aims. Even more puzzlingly, this is not without precedent. Eleven years ago, partly in response to the Asian financial crisis of 1997, the Basel Committee attempted to overhaul global banking rules in order to enhance the stability of the global financial system. The culmination of its five-year efforts, the Basel II Accord, was abandoned by regulators before ever being fully implemented. In this paper, I ask why Basel II failed to meet the Basel Committee's original objectives and why Basel III has met a similar fate. Drawing on recent work on the politics of global regulation, I present a theoretical framework which emphasizes the importance of timing and sequencing in determining the outcome of rule-making in global finance. The success of this framework in explaining the failure of Basel II and Basel III is an invitation to scholars in the field of International Relations to take 'time' seriously as an analytical variable.

Since the global financial crisis, scholars of international political economy (IPE) have increasingly relied on the concept of 'regulatory capture' to explain the weakness of regulatory oversight and, hence, regulatory failures. Yet despite the widespread use of the concept of regulatory capture, its precise mechanisms are not well understood. This paper empirically investigates this hypothesis by examining one important institution of global financial governance that has been subjected to intense private sector lobbying at the transnational level: the Basel Committee on Banking Supervision. Using extensive archival material as well as interviews with participants in the generation of the Basel II Capital Accord, I argue that while private sector lobbyists had unprecedented access to the regulatory policymaking process, this access did not always translate into influence. Furthermore, when influence was present, it sometimes had the effect of increasing regulatory stringency, rather than weakening regulation. As such, I argue that our understanding of the process of transnational policy formation would benefit from a more nuanced understanding of the contingency of private sector 'influence' over the regulatory process, rather than the extensive, all-or-nothing depiction of regulatory 'capture' that currently prevails within the IPE literature.

This paper theorizes about the new international financial architecture as a manifestation of the 'second face of neoliberalism' - financial market reregulation through technocratic obfuscation and insularity from democratic political pressure. Using a more expansive definition of the new international financial architecture, one that includes the institutional nexus of international monetary management along with the rules and regulatory bodies governing capital, this argument is developed through an analysis of the origins and functions of two institutions comprising the new international financial architecture - the Basel Capital Accord and the diffusion of inflation targeting regimes across central banks. This paper excavates the neoliberal logic inscribed in these institutions and further shows how these new forms of institutional logic contributed to the financial crisis of 2008 by putting in place a set of opportunities and constraints that led to rapid growth in the market for asset-backed securities. The implications of this analysis for the future of regulatory reform are discussed, with particular attention paid to the question of what role central banks should play in this process.

Policy discussions on the recent financial crisis feature widespread calls to address the pro-cyclical effects of regulation. The main concern is that the new risk-sensitive bank capital regulation (Basel II) may amplify business cycle fluctuations. This paper compares the leading alternative procedures that have been proposed to mitigate this problem. We estimate a model of the probabilities of default (PDs) of Spanish firms during the period 1987-2008, and use the estimated PDs to compute the corresponding series of Basel II capital requirements per unit of loans. These requirements move significantly along the business cycle, ranging from 7.6% (in 2006) to 11.9% (in 1993). The comparison of the different procedures is based on the criterion of minimizing the root mean square deviations of each adjusted series with respect to the Hodrick-Prescott trend of the original series. The results show that the best procedures are either to smooth the input of the Basel II formula by using through-the-cycle PDs or to smooth the output with a multiplier based on GDP growth. Our discussion concludes that the latter is better in terms of simplicity, transparency, and consistency with banks' risk pricing and risk management systems. For the porfolio of Spanish commercial and industrial loans and a 45% loss given default (LGD), the multiplier would amount to a 6.5% surcharge for each standard deviation in GDP growth. The surcharge would be significantly higher with cyclically varying LGDs.

This article provides insights into the effective regulation of private sector innovation. It coins a term—\"innovation-framing regulation\"—to describe a particular quality of much of financial regulation in the recent era. It sketches a particular financial innovation (securitization and the marketing of securitized assets on derivatives markets), and describes three regulatory interactions having to do with that innovation. I identify three key assumptions that are ripe for re-evaluation: the notion that private sector innovation is beneficial, virtually by definition; the assumption that the regulatory moment is the crucial moment in regulatory design; and the belief that regulation somehow sits outside innovation and can be untouched by it. I argue that effective regulation of private sector innovation requires a clearer and more nuanced understanding of innovation, and engagement with the normative choices underpinning innovation-framing regulation.

Purpose Amidst the backdrop of a wide array of structural developments that have revolutionized the competitive landscape of Indian commercial banking, this paper aims to empirically examine the role of two external monitoring mechanisms – competition and concentration on financial stability and further highlights the significance of bank-level heterogeneity in the nexus. Design/methodology/approach The study uses the Lerner index, defined through a translog specification, as a measure of market power. A system generalized method of moments technique accounts for the dynamic associations among the competition-concentration-stability nexus. The study further examines the moderating effect of ownership, size and capitalization on the nexus. The study also uses the Boone indicator and comments on the competition-bank stability relationship after controlling for bank governance. Findings The findings indicate that banks are less stable in a more competitive and higher concentrated environment. Exploring bank-level heterogeneity, first, the authors report that as competition increases, state-owned banks have greater incentives to undertake risky activities than private and foreign banks, which point to implicit sovereign guarantees that characterize the former. Second, the authors document an adverse influence of competition on the soundness of larger banks consistent with the “too-big-to-fail” assertion. Third, results corroborate the disciplinary role of regulatory capital and lend support to stricter capital norms under Basel III in a more competitive environment. Originality/value This paper is perhaps the first to capture competition and concentration in a single model; to reconcile conflicting evidence on competition-risk nexus; to shed light on the joint effect of competition and Basel accords for Indian banks.

Purpose: The aim of this study is to shed a light on risk management in Jordanian commercial banks in accordance with the Basel Accords.   Theoretical framework: The researcher reviewed the relevant literature related to risk management   Design/methodology/approach: The descriptive analytical approach was adopted. The questionnaire was used as a data collection tool. The sample consists of all the public administrations in banks and employees in risk management and control. It consists from 120 individuals.   Findings: The results of the study showed that the field of \"The application of banking risk management in Jordanian commercial banks in accordance with the Basel Accords\" ranges from strong to medium, while the field of \"Techniques and principles of banking risk management applied by Jordanian commercial banks\" ranges from strong to moderate,   Research, Practical & Social implications: This study allows Jordanian commercial banks to improve their abilities in managing risks based on Basel accords   Originality/value: This study is important because it is one of the few studies that shed a light on Basel Accords along with risk management

This article reports estimates of the long-run costs and benefits of having banks fund more of their assets with loss-absorbing capital, or equity. We model how shifts in funding affect required rates of return and how costs are influenced by the tax system. We draw a clear distinction between costs to individual institutions (private costs) and overall economic (or social) costs. We find that the amount of equity capital that is likely to be desirable for banks to use is very much larger than banks have used in recent years and also higher than targets agreed under the Basel III framework.

We use a quasi-experimental research design to examine the effect of model-based capital regulation on the procyclicality of bank lending and firms' access to funds. In response to an exogenous shock to credit risk in the German economy, capital charges for loans under model-based regulation increased by 0.5 percentage points. As a consequence, banks reduced the amount of these loans by 2.1 to 3.9 percentage points more than for loans under the traditional approach with fixed capital charges. We find an even stronger effect when we examine aggregate firm borrowing, suggesting that microprudential capital regulation can have sizeable real effects.