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Basel II: A Contracting Perspective

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  • Edward J. Kane
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    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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    File URL: http://www.nber.org/papers/w12705.pdf
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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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    Handle: RePEc:nbr:nberwo:12705

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    1. Oliver Hart & John Moore, 1998. "Foundations of Incomplete Contracts," NBER Working Papers 6726, National Bureau of Economic Research, Inc.
    2. Nicolai J. Foss, 1996. "Firms, Incomplete Contracts and Organizational Learning," DRUID Working Papers 96-2, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
    3. Kane, Edward J, 1981. "Accelerating Inflation, Technological Innovation, and the Decreasing Effectiveness of Banking Regulation," Journal of Finance, American Finance Association, vol. 36(2), pages 355-67, May.
    4. Eric Bennett Rasmusen, 2001. "Explaining Incomplete Contracts as the Result of Contract-Reading Costs," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 0(1), pages 2.
    5. MacLeod, W. Bentley, 2006. "Reputations, Relationships and the Enforcement of Incomplete Contracts," IZA Discussion Papers 1978, Institute for the Study of Labor (IZA).
    6. Edward J. Kane, 1981. "Accelerating Inflation, Technological Innovation, and the Decreasing Effectiveness of Banking Regulation," NBER Working Papers 0638, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Robert Jarrow, 2007. "A Critique of Revised Basel II," Journal of Financial Services Research, Springer, vol. 32(1), pages 1-16, October.

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