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Basel II: A Contracting Perspective

  • Edward Kane


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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Article provided by Springer in its journal Journal of Financial Services Research.

Volume (Year): 32 (2007)
Issue (Month): 1 (October)
Pages: 39-53

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Handle: RePEc:kap:jfsres:v:32:y:2007:i:1:p:39-53
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  1. Oliver Hart & John Moore, 1998. "Foundations of Incomplete Contracts," Harvard Institute of Economic Research Working Papers 1846, Harvard - Institute of Economic Research.
  2. 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.
  3. Paul Kupiec, 2007. "Financial stability and Basel II," Annals of Finance, Springer, vol. 3(1), pages 107-130, January.
  4. W. Bentley MacLeod, 2006. "Reputations, Relationships and the Enforcement of Incomplete Contracts," CESifo Working Paper Series 1730, CESifo Group Munich.
  5. 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.
  6. 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.
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