After the Financial Crisis
Edited by Sylvester Eijffinger and Donato Masciandaro
Chapter 12: Financial Regulation
Charles A.E. Goodhart1 Introduction Financial regulation has always been a theoretical, a pragmatic response by practical officials, and concerned politicians, to immediate problems, following the dictum that ‘We must not let that happen again’. When the Basel Committee on Banking Supervision (BCBS) was established in 1974/75, to handle some of the emerging problems of global finance and cross-border banking, the modus operandi then developed was to hold a roundtable discussion of current practice in each member state with the objective of trying to reach an agreement on which practice was ‘best’, and then to harmonize on that. Little, or no, attempt was made to go back to first principles, and to start by asking why there should be a call for regulation on banking, whether purely domestic or crossborder, in the first place. Thus Basel I, the Accord on Capital Regulation in 1988, was propelled by concern that many of the major international banks, especially in the USA, would have been made insolvent, under a mark-to-market accounting procedure, by the MAB (Mexico, Argentina, Brazil) default crisis of 1982. Congress wanted to impose higher capital regulations on US banks, but was deterred by the ‘Level Playing Field’ argument that any unilateral move would just shift business to foreign, especially to Japanese, banks. Hence the appeal to the BCBS. Again little, or no, attempt was made to explore what was the fundamental need for holding capital, or what might be its optimal level (see Hellwig, 1996 and 2008). The target of eight...
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