Edited by Joseph E. Harrington Jr and Yannis Katsoulacos
Chapter 16: Rebuilding International Financial Regulation and Basel III
Kern Alexander 16.1 THE FAILINGS OF THE INTERNATIONAL STANDARD SETTING BODIES TO CONTROL RISK PRE-CRISIS The financial crisis that began in 2007 demonstrates how international financial standard setting bodies, such as the Basel Committee on Banking Supervision, failed to develop regulatory and supervisory standards to limit excessive risk-taking in structured finance markets and in Overthe-Counter (OTC) derivatives markets and to provide adequate lossabsorbent capital in the banking sector. These regulatory and supervisory weaknesses were manifest in the practices of the leading Basel Committee members, such as the USA and the UK. US and UK regulators and policymakers failed to grasp how the so-called shadow banking system would fail to self-regulate itself and the potential social costs of this failure for their national financial systems and the impact this would have on global financial markets and the world economy. During the 1980s to 2000s, in the most advanced financial systems (the G10 countries), financial markets were undergoing significant changes involving a shift away from a bank-based model of finance to a wholesale capital market model of finance; this had brought diversification and increased liquidity to financial markets, but also had introduced systemic risks to the financial system, which international standard setting bodies, such as the Basel Committee, the Joint Forum on Financial Conglomerates and the Financial Stability Forum had failed to identify and recommend adequate controls. Specific types of financial innovation – such as securitization and credit default swaps – that began in the early 1990s, partially in response to regulatory requirements such...
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