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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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