US Implementation of Basel II: Lessons for Informal International Lawmaking

Abstract

This paper examines the highly contentious and protracted implementation of the Basel II accord on bank capital adequacy in the United States. As a formal matter, this process should have been simple, as banking regulators already had the relevant authority under existing legislation. This form of transgovernmental standard-setting has long been regarded with suspicion due to concerns that it compromises democratic legitimacy and accountability. The U.S. implementation of Basel II, however, poses challenges for this critique. Over several years, deep divisions emerged among banks and regulators, numerous Congressional hearings were held, regulators faced hostile questioning and severe criticism, and the Accord suffered long delays and substantial modifications. Based on this experience, the paper argues that robust domestic implementation processes advance certain forms of accountability, such as legislative control over regulators and responsiveness to affected domestic constituencies, at the exclusion, and perhaps the detriment, of others, such as accountability to banks, firms and consumers in other countries. The accountability benefits must also be balanced against the resulting costs and delays and the risk of compromising the uniformity and effectiveness of the standards.

This paper was prepared for the Hague Institute of International Law’s project, “Informal International Law-Making: Mapping the Action and Testing Concepts of Accountability and Effectiveness.”

Keywords: Basel II, Capital Adequacy, Basel Committee, Banking Regulation, Transnational Regulatory Networks

JEL Classification: F02, G21, K22, K23