A regulatory regime and the new Basel Capital Accord
| Date | 01 April 2001 |
| Pages | 327-337 |
| Published date | 01 April 2001 |
| DOI | https://doi.org/10.1108/eb025086 |
| Author | David T. Llewellyn |
| Subject Matter | Accounting & finance |
Journal of Financial Regulation and Compliance Volume 9 Number 4
A regulatory regime and the new Basel
Capital Accord
David T. Llewellyn
Received: 1st August, 2001
Department of Economics, Loughborough University, Loughborough, Leicestershire LE11 3TU;
tel:
+44 (0)1509 222 700; fax: +44 (0)1509 223 910; e-mail: d.t.llewellyn@lboro.ac.uk
David Llewellyn is Professor of Money and
Banking at Loughborough University and
formerly a Public Interest Director of the
Personal Investment Authority. He also
serves as a consultant to banks and regu-
latory agencies in various countries. He is
the President of SUERF: a network asso-
ciation of central banks, banks and aca-
demics.
ABSTRACT
The purpose of this paper is to set the
proposed
new capital
adequacy arrangements
in the wider
context of what is termed a regulatory regime.
The central theme is that the components of the
regulatory regime need to be combined in an
overall regulatory strategy, and that while all
the components are
necessary,
none alone is
suf-
ficient. The optimum mix of the components of
the regime changes over time as market condi-
tions and compliance culture change. It is
argued
that, in current
conditions,
there needs to
be a shift within the regime in five dimensions.
The proposed new Accord is
discussed
in terms
of
this
regulatory
regime
paradigm. The Accord
is a welcome move in the
direction
of
a broader
approach to bank regulation and a recognition
that other mechanisms (notably an enhanced
role for market discipline) are
needed.
INTRODUCTION
The purpose of this paper is to set the capi-
tal adequacy arrangements of the proposed
new Basel Accord in the wider context of
what will be termed a regulatory regime.
More detailed aspects of the proposed
Accord are covered in other papers in this
issue of the Journal. The starting point is
the experience of recent banking crises.
Bank failures around the world have been
common, large and costly. Five common
characteristics of bank crises have been:
— weak internal risk analysis, manage-
ment and control systems within banks
— inadequate official supervision
— weak (or even perverse) incentive struc-
tures within the financial system gener-
ally and financial institutions in
particular
— inadequate information disclosure
— inadequate corporate governance
arrangements both within banks and
their large corporate customers.
The discussion is set within the context of
what is termed a regulatory regime which
is wider than the rules and monitoring
conducted by regulatory agencies. Just as
the causes of banking crises are multidi-
mensional, so the principles of an effective
regime for financial stability need to incor-
porate a wider range of issues than exter-
nally imposed rules on bank behaviour.
The key components of a regulatory
regime are:
Journal of Financial Regulation
and Compliance, Vol. 9. No. 4.
2001,
pp. 327-337
© Henry Stewart Publications,
1358-1988
Page 327
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