Basel Committee On Banking Supervision Essay ⋆ Business Essay Examples ⋆ EssayEmpire

The Basel Committee on Banking Regulation and Supervisory Practices (Basel Committee), founded in 1974 by the central bankers from G10 countries, serves as a forum for banking supervisory matters. Current members of the Basel Committee come from Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden, Switzerland, the United Kingdom, and the United States. The committee’s secretariat is situated at the Bank for International Settlements in Basel, Switzerland, and consists of 15 people who are mostly professional supervisors on temporary assignment from their home institutions.

The committee does not possess any formal authority, and its developments do not have legal force. Rather, it attempts to formulate broad guidelines and recommends codes of best practices that deal with issues such as capital adequacy, the functioning of payment and settlement systems, and other aspects of banking supervision. Central banks then incorporate these guidelines and practices into national regulations of their respective countries.

The committee includes four main subcommittees, around which the work is organized: the Accord Implementation Group, the Policy Development Group, the Accounting Task Force, and the International Liaison Group. The latter provides a platform for nonmember countries to contribute to the committee’s current and new initiatives. The committee circulates the papers in which the results of its research are presented to banking authorities around the world.

The Basel Committee aims to encourage convergence toward common standards and approaches in banking supervision. The need for such unification comes from the increasingly global nature of financial markets and a strikingly broad scale of the recent financial crises. Over the years, the committee has implemented various guidelines on the amount and substance of banking supervision. In 1988 the committee adopted a package of standards related to capital adequacy—the so-called Basel Capital Accord, or Basel I. Basel I has become an important international standard in the field of banking supervision.

In 1999 the committee proposed a New Capital Adequacy Framework, also known as Basel II. It is meant to replace the 1988 document. Basel II Framework emphasizes an incentive-based approach toward financial regulation in contrast to the rule-based regulation that was in place before. Many countries, including nonmembers, have included the Basel standards in some form into their national regulation for various reasons, such as a wish to improve the soundness of their banking systems, to raise their credit ratings and country’s standing in the international arena, and to benefit in other ways by complying with a universally recognized standard.

Another important document produced by the Basel Committee is called “Core Principles for Effective Banking Supervision.” The document, along with the “Core Principles Methodology,” has been used by countries as a benchmark for assessing the strength of their supervision systems and for identifying specific steps to be taken to achieve baseline quality of their practices.

The work of the Basel Committee is largely based on personal contacts and is operated by consensus. The decision-making process is nontransparent. Some criticize the committee for its secrecy and a lack of accountability. Although regulations produced by the committee are voluntary and nonbinding, in practice countries face strong pressure to adopt the Basel proposals. For example, the International Monetary Fund (IMF) often requires compliance with the Capital Accord as a condition for receiving financial aid.

The major obstacle to negotiation of binding international agreements lies within the area of so-called sovereignty costs—potential reduction of national autonomy as a result of entering the agreement. Soft laws, on the other hand, allow sufficient flexibility to take national interests and local context into account. The Capital Accord is meant to be a soft piece of regulation, but does not always work like this in practice.

Recent efforts of the committee have concentrated on the implementation of the Basel II Framework, particularly such issues as the coordination between home and host supervisory authorities (global risk management, diversification effects, risk concentrations). A significant number of countries have already implemented Basel II Framework (fully or partially), whereas others are working on the creation of necessary infrastructure (legal, regulatory, and technical). Basel II significantly influences financial institutions, since they have to create new departments, modeling techniques, policies, and information technology systems.

Bibliography:

Kern Alexander, Rahul Dhumale, and John Eatwell, Global Governance of Financial Systems: The International Regulation of Systemic Risk (Oxford University Press, 2006);
Bank for International Settlements, www.bis.org (cited March 2009);
Marie-Laure Djelic and Kerstin Sahlin-Andersson, eds., Transnational Governance: Institutional Dynamics of Regulation (Cambridge University Press, 2006);
Steven Sloan, “Basel Guidelines on Calculating Risk,” American Banker (v.173/141, 2008).

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