GEG WP 2009/52 Why Basel II failed and why any Basel III is doomed
According to conventional wisdom, the Basel II Accord – a set of capital adequacy standards for international banks drawn up by a committee of G-10 supervisors – is essential if we are to avoid another financial crisis. This paper argues that this conclusion is false: Basel II is not the solution to the crisis, but instead an underlying cause of it. I ask why Basel II’s creators fell so short of their aim of improving the safety of the international banking system – why Basel II failed. Drawing on recent work on global regulatory capture, I present a theoretical framework which emphasises the importance of timing and sequencing in determining the outcome of rule-making in international finance. This framework helps to explain not only why Basel II failed, but also why the latest raft of proposals to regulate the international banking system – from the US Treasury’s recent financial white paper to the latest round of G-20 talks in Pittsburgh – are likely to meet a similar fate.
Author Bio
Ranjit Lall is currently a Visiting Research Fellow at the Blavatnik School of Government, Oxford University. His primary research interests are in the areas of global governance, international financial regulation, international institutional theory and comparative political economy. His publications include 'From Failure to Failure: The Politics of International Banking Regulation' (Review of International Political Economy, 2012) and 'Reforming Global Banking Standards: Back to the Future?' (in Governing Through Standards: Origins, Drivers and Limitations, eds. S. Ponte, P. Gibbon and J. Vestergaard, 2011). He is also the author of 'Why Basel II Failed and Why Any Basel III is Doomed' (Oxford University Global Economic Governance Working Paper, 2009). Lall holds a BA in Philosophy, Politics and Economics (PPE) from Merton College, Oxford University. He was awarded the Oxford University Gibbs Prize for best undergraduate thesis in politics. Before coming to Harvard, he was an economist in the Bank of England's Financial Stability Directorate and a Peter Martin Fellow at the Financial Times.
