Why Are There So Many Banking Crises? The Politics and Policy of Bank Regulation

By Jean-Charles Rochet | Go to book overview

Chapter Ten

The Three Pillars of Basel II: Optimizing the Mix

Jean-Paul Décamps, Jean-Charles Rochet, and Benoît Roger


10.1 Introduction

The ongoing reform of the Basel Accord1 relies on three “pillars”: capital adequacy requirements, supervisory review, and market discipline. Yet the articulation of how these three instruments are to be used in concert is far from clear. On the one hand, the recourse to market discipline is rightly justiñed by common-sense arguments about the increasing complexity of banking activities, and the impossibility for banking supervisors to monitor these activities in detail. It is therefore legitimate to encourage monitoring of banks by professional investors and financial analysts as a complement to banking supervision. Similarly, a notion of gradualism in regulatory intervention is introduced (in the spirit of the reform of U.S. banking regulation, following the FDIC Improvement Act of 1991).2 It is suggested that commercial banks should, under “normal circumstances,” maintain economic capital way above the regulatory minimum and that supervisors could intervene if this is not the case. Yet, and somewhat contradictorily, while the proposed reform states very precisely the complex rennements of the risk weights to be used in the computation of this regulatory minimum, it remains silent on the other intervention thresholds.

1The Basel Accord, elaborated in July 1988 by the Basel Committee on Banking
Supervision (BCBS), required internationally active banks from the G10 countries to hold
a minimum total capital equal to 8% of risk-adjusted assets. It was later amended to cover
market risks. It is currently being revised by the BCBS, which has released for comment a
proposal of amendment, commonly referred to as Basel II (Basel Committee 1999, 2001).

2The FDIC Improvement Act of 1991 requires that each U.S. bank be placed in one
of five categories based on its regulatory capital position and other criteria (CAMELS
ratings). Undercapitalized banks are subject to increasing regulatory intervention as their
capital ratios deteriorate. This prompt corrective action (PCA) doctrine is designed to
limit supervisory forbearance. Jones and King (1995) provide a critical assessment of
PCA. They suggest that the risk weights used in the computation of capital requirements
are inadequate.

-281-

Notes for this page

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this page

Cited page

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited page

Bookmark this page
Why Are There So Many Banking Crises? The Politics and Policy of Bank Regulation
Table of contents

Table of contents

Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this book

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this book
  • Bookmarks
  • Highlights & Notes
  • Citations
/ 308

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.