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Rebalancing the three pillars of Basel II

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  • Jean-Charles Rochet

Abstract

The author observes that the three pillars of Basel II seem uneven: Pillars 1 and 2 have eclipsed Pillar 3 - market discipline and disclosure - in the Basle Committee's deliberations. He works through a banking model of the three Pillars, shows how the optimal liquidation limit varies with bank liability structure and the regulatory regime, and argues that market discipline, via mandatory subordinated debt issuance, can reduce forbearance by supervisors.

Suggested Citation

  • Jean-Charles Rochet, 2004. "Rebalancing the three pillars of Basel II," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 7-21.
  • Handle: RePEc:fip:fednep:y:2004:i:sep:p:7-21:n:v.10no.2
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    References listed on IDEAS

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    Cited by:

    1. Philip Bond & Itay Goldstein & Edward Simpson Prescott, 2006. "Market-based regulation and the informational content of prices," Working Paper 06-12, Federal Reserve Bank of Richmond.
    2. Jijun Niu, 2008. "Bank Competition, Risk, and Subordinated Debt," Journal of Financial Services Research, Springer;Western Finance Association, vol. 33(1), pages 37-56, February.
    3. François Meunier, 2008. "Crise des marchés de dette ? Caveat emptor !," Revue d'Économie Financière, Programme National Persée, vol. 7(1), pages 243-249.
    4. Mohamed Belhaj & Nataliya Klimenko, 2012. "Optimal Preventive Bank Supervision: Combining Random Audits and Continuous Intervention," Working Papers halshs-00790464, HAL.
    5. Eisenbach, Thomas M. & Lucca, David O. & Townsend, Robert M., 2016. "The economics of bank supervision," Staff Reports 769, Federal Reserve Bank of New York, revised 01 Jan 2017.
    6. repec:eee:jfinec:v:125:y:2017:i:2:p:266-285 is not listed on IDEAS
    7. Polo, Andrea, 2007. "Corporate governance of banks: the current state of the debate," MPRA Paper 2325, University Library of Munich, Germany.
    8. Tsai, Jeng-Yan & Hung, Wei-Ming, 2013. "Bank capital regulation in a cap option framework," International Review of Economics & Finance, Elsevier, vol. 25(C), pages 66-74.
    9. Tsai, Jeng-Yan, 2013. "Optimal bank interest margins under capital regulation in a call-option utility framework," Economic Modelling, Elsevier, vol. 31(C), pages 557-565.
    10. repec:eee:spacre:v:17:y:2014:i:1:p:58-70 is not listed on IDEAS
    11. Elisabetta Montanaro, 2013. "Regole di Basilea e modelli di vigilanza: quale convergenza? (Basel rules and supervisory models: What convergence?)," Moneta e Credito, Economia civile, vol. 66(264), pages 415-442.
    12. Lassaâd Mbarek & Dorra Mezzez Hmaied, 2012. "Bank informational opacity: evidence from the Tunisian stock market," Journal of Financial Regulation and Compliance, Emerald Group Publishing, vol. 20(3), pages 278-292, July.
    13. Koziol, Christian & Lawrenz, Jochen, 2012. "Contingent convertibles. Solving or seeding the next banking crisis?," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 90-104.
    14. Vauhkonen, Jukka, 2009. "Bank safety under Basel II capital requirements," Research Discussion Papers 29/2009, Bank of Finland.
    15. Donald P. Morgan & Kevin J. Stiroh, 2005. "Too big to fail after all these years," Staff Reports 220, Federal Reserve Bank of New York.
    16. Fatma Chakroun & Fathi Abid, 2015. "Optimal CAR simulation," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 2(04), pages 1-31, December.
    17. Goldsmith-Pinkham, Paul & Hirtle, Beverly & Lucca, David O., 2016. "Parsing the content of bank supervision," Staff Reports 770, Federal Reserve Bank of New York.
    18. Niu, Jijun, 2008. "Can subordinated debt constrain banks' risk taking?," Journal of Banking & Finance, Elsevier, vol. 32(6), pages 1110-1119, June.
    19. Ojo, Marianne, 2015. "Revisions to the simpler approaches to operational risk: the need for enhanced disclosures and risk sensitive measures," MPRA Paper 61329, University Library of Munich, Germany.
    20. Chateau, John-Peter D., 2007. "Beyond Basel-2 simplified standardized approach: Credit risk valuation of short-term loan commitments," International Review of Financial Analysis, Elsevier, vol. 16(5), pages 412-433.

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    Keywords

    Bank supervision ; Bank capital ; Banking law;

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