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Basel II: A Contracting Perspective

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  • Edward 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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Suggested Citation

  • Edward Kane, 2007. "Basel II: A Contracting Perspective," Journal of Financial Services Research, Springer;Western Finance Association, vol. 32(1), pages 39-53, October.
  • Handle: RePEc:kap:jfsres:v:32:y:2007:i:1:p:39-53
    DOI: 10.1007/s10693-007-0020-5
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    File URL: http://hdl.handle.net/10.1007/s10693-007-0020-5
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    References listed on IDEAS

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    1. Oliver Hart & John Moore, 1999. "Foundations of Incomplete Contracts," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 115-138.
    2. Rasmusen Eric Bennett, 2001. "Explaining Incomplete Contracts as the Result of Contract-Reading Costs," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 1(1), pages 1-39, October.
    3. 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.
    4. 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 355-367, May.
    5. W. Bentley MacLeod, 2006. "Reputations, Relationships and the Enforcement of Incomplete Contracts," CESifo Working Paper Series 1730, CESifo Group Munich.
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    Citations

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    Cited by:

    1. Warren Bailey & Lin Zheng, 2013. "Banks, Bears, and the Financial Crisis," Journal of Financial Services Research, Springer;Western Finance Association, vol. 44(1), pages 1-51, August.
    2. 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, vol. 36(10), pages 2693-2716.
    3. Adrian Blundell-Wignall & Paul E Atkinson, 2008. "The Sub-prime Crisis: Causal Distortions and Regulatory Reform," RBA Annual Conference Volume,in: Paul Bloxham & Christopher Kent (ed.), Lessons from the Financial Turmoil of 2007 and 2008 Reserve Bank of Australia.
    4. Ana Kundid Novokmet, 2015. "Cyclicality of bank capital buffers in South-Eastern Europe: endogenous and exogenous aspects," Financial Theory and Practice, Institute of Public Finance, vol. 39(2), pages 139-169.
    5. Edward Kane, 2007. "Connecting National Safety Nets: The Dialectics of the Basel II Contracting Process," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 35(4), pages 399-409, December.
    6. 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.
    7. Douglas Evanoff & Philip Bartholomew & Robert DeYoung & Cosmin Lucaci & Ronnie Phillips, 2008. "Bank Structure Conference Impact Study," Journal of Financial Services Research, Springer;Western Finance Association, vol. 34(2), pages 99-121, December.
    8. Robert Jarrow, 2007. "A Critique of Revised Basel II," Journal of Financial Services Research, Springer;Western Finance Association, vol. 32(1), pages 1-16, October.
    9. Lejot , Paul & Arner, Douglas & Schou-Zibell, Lotte, 2008. "Securitization in East Asia," Working Papers on Regional Economic Integration 12, Asian Development Bank.

    More about this item

    Keywords

    Basel II; sequential contracting; financial safety nets; financial regulation; incomplete contracts;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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