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Basel II: A Contracting Perspective

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  • Edward J. Kane

Abstract

Financial safety nets are incomplete social contracts that assign responsibility to various economic sectors for preventing, detecting, and paying for potentially crippling losses at financial institutions. This paper uses the theories of incomplete contracts and sequential bargaining to interpret the Basel Accords as a framework for endlessly renegotiating minimal duties and standards of safety-net management across the community of nations. Modelling the stakes and stakeholders represented by different regulators helps us to understand that inconsistencies exist in prior understandings about the range of sectoral effects that the 2004 Basel II agreement might produce. The analysis seeks to explain why, in the U.S., attempting to resolve these inconsistencies has spawned an embarrassingly fractious debate and repeatedly pushed back Basel II's scheduled implementation.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12705.

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Date of creation: Nov 2006
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Publication status: published as Edward Kane, 2007. "Basel II: A Contracting Perspective," Journal of Financial Services Research, Springer, vol. 32(1), pages 39-53, October.
Handle: RePEc:nbr:nberwo:12705

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  1. Oliver Hart & John Moore, 1998. "Foundations of Incomplete Contracts," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1846, Harvard - Institute of Economic Research.
  2. W. Bentley MacLeod, 2006. "Reputations, relationships and the enforcement of incomplete contracts," Discussion Papers, Columbia University, Department of Economics 0506-23, Columbia University, Department of Economics.
  3. Nicolai J. Foss, 1996. "Firms, Incomplete Contracts and Organizational Learning," DRUID Working Papers, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies 96-2, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
  4. Kane, Edward J, 1981. "Accelerating Inflation, Technological Innovation, and the Decreasing Effectiveness of Banking Regulation," Journal of Finance, American Finance Association, American Finance Association, vol. 36(2), pages 355-67, May.
  5. Rasmusen Eric Bennett, 2001. "Explaining Incomplete Contracts as the Result of Contract-Reading Costs," The B.E. Journal of Economic Analysis & Policy, De Gruyter, De Gruyter, vol. 1(1), pages 1-39, October.
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Cited by:
  1. Lejot , Paul & Arner, Douglas & Schou-Zibell, Lotte, 2008. "Securitization in East Asia," Working Papers on Regional Economic Integration, Asian Development Bank 12, Asian Development Bank.
  2. Adrian Blundell-Wignall & Paul E Atkinson, 2008. "The Sub-prime Crisis: Causal Distortions and Regulatory Reform," RBA Annual Conference Volume, Reserve Bank of Australia, in: Paul Bloxham & Christopher Kent (ed.), Lessons from the Financial Turmoil of 2007 and 2008 Reserve Bank of Australia.
  3. Richard Herring, 2007. "The Rocky Road to Implementation of Basel II in the United States," Atlantic Economic Journal, International Atlantic Economic Society, International Atlantic Economic Society, vol. 35(4), pages 411-429, December.
  4. Robert Jarrow, 2007. "A Critique of Revised Basel II," Journal of Financial Services Research, Springer, Springer, vol. 32(1), pages 1-16, October.
  5. Alexander, Gordon J. & Baptista, Alexandre M. & Yan, Shu, 2012. "When more is less: Using multiple constraints to reduce tail risk," Journal of Banking & Finance, Elsevier, Elsevier, vol. 36(10), pages 2693-2716.
  6. Edward J. Kane, 2013. "The Inevitability of Shadowy Banking," INET Research Notes 25, Institute for New Economic Thinking (INET).
  7. Douglas Evanoff & Philip Bartholomew & Robert DeYoung & Cosmin Lucaci & Ronnie Phillips, 2008. "Bank Structure Conference Impact Study," Journal of Financial Services Research, Springer, Springer, vol. 34(2), pages 99-121, December.
  8. Cihak, Martin & Demirguc-Kunt, Asli & Johnston, R. Barry, 2013. "Incentive audits : a new approach to financial regulation," Policy Research Working Paper Series 6308, The World Bank.
  9. Warren Bailey & Lin Zheng, 2013. "Banks, Bears, and the Financial Crisis," Journal of Financial Services Research, Springer, Springer, vol. 44(1), pages 1-51, August.
  10. Edward Kane, 2007. "Connecting National Safety Nets: The Dialectics of the Basel II Contracting Process," Atlantic Economic Journal, International Atlantic Economic Society, International Atlantic Economic Society, vol. 35(4), pages 399-409, December.

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