Tuesday, April 1, 2008

Basel II rethink in wake of Bear Stearns collapse

The Basel Committee on Banking Supervision (BCBS) has announced that it is to have a rethink on some aspects of the Basel II regulation following the Bear Stearns collapse, in particular its "Sound Practices for Managing Liquidity in Banking Organizations" guidelines. (for more detail, see these posts by David Zaring over on his Conglomerate blog - thanks to Brian Bolin for the links). Zaring's main complaint seems to be that US administrators now have to persuade foreign banking supervisors of the merits of the regulatory changes that they would like to see introduced. This is, of course true, as far as it goes - but such is the nature of global governance; and the highly informal organisational structure of the BCBS means that it is far more likely to be able to respond with the requisite speed and flexibility to the recent "market turmoil".

A more interesting issue, from a GAL perspective at least, is whether perceived failures in the regulatory outcomes (in this case, apparently the level of willingness to count subprime mortgage securities towards capital adequacy requirements) will lead to the establishment of any more robust administrative law mechanisms to regulate the standard-setting process itself, in particular through providing for greater transparency and participation in the proceedings. To date, the BCBS - an informal network of public officials - is almost completely unencumbered by such considerations, its only concession being the introduction of an extremely rudimentary (and scarcely binding) "notice and comment" procedure through publishing proposals on its website and inviting comments from those with the time and expertise to understand them (for a - perhaps overly optimistic - look at the GAL significance of the BCBS and Basel II, see this article by Michael Barr and Geoffrey Millar).

Of course, there is another role in which the BCBS is significant in terms of GAL, and that is a a source of "distributed administration" - through creating global norms that must then be interpreted and applied by domestic administrative bodies (including, in this case, purely private bodies carrying out a public function, such as Credit Ratings Agencies - for more detail, see this paper by Larissa Dragomir). In neither case, however, is it immediately clear how, or indeed if, the current crisis in the sector will affect the global banking regime in terms of those issues most central to the GAL project, namely the increase of participation in and transparency of proceedings, and the establishment of mechanisms for holding those exercising public power to account for the manner in which they do so. Although it should be noted that Zaring has characterised this letter from the US Securities and Exchange Commission as its "justification" of its own supervision of Bear Stearns to the BCBS - could this be the beginnings of a rudimentary accountability mechanism within the sphere of global banking regulation?

Probably not.

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