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