The Governance and Regulation of International Finance

The Governance and Regulation of International Finance

Private Regulation series

Geoffrey P. Miller and Fabrizio Cafaggi

This thought-provoking book adds a new perspective to the analysis of how regulation should respond to the global financial crisis of 2008–2009. It focuses on the ‘private’ as opposed to ‘public’ aspect of regulation, and highlights the works of the public–private dialectic in regulation and enforcement.

Chapter 6: The internal ratings-based and advanced measurement approaches for regulatory capital under the ‘Basel regime’

Geoffrey P. Miller and Fabrizio Cafaggi

Subjects: economics and finance, financial economics and regulation, law - academic, finance and banking law, regulation and governance

Extract

Private regulation is a well-established characteristic of the banking industry. Banks develop, monitor and enforce rules concerning conditions of employment, compensation schemes and other in-house standards, all of which can be understood as examples of private regulation. Another important example of private regulation in banking concerns risk management. In particular innovations in finance theory and computing technology of the 1980s facilitated the use of complex risk models in the management of financial institutions. The models designed to cover, for example, credit and operational risk acquired a more transnational character in the 2000s. Their transnational advent became possible with the Basel Committee of Banking Supervision’s (BCBS) endorsement of influential public regulatory frameworks, known as the Basel Accords, which relied heavily on these models. Even though a host of scholarly literature addresses at length both the intricate details of the regime created around these models (or what we will refer to in this Chapter as the ‘Basel regime’) and the risk models themselves, only rarely does this literature attend to the multifaceted interplays between the private and the public components of risk model-based regulation. As a result there is little understanding of the significance of the embedding of these transnational private regimes in a broader architecture constituted by largely public regulatory bodies.

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