Bad Regulation: Basel 1 and Basel 2

Abstract

In 1988, the Basel Committee on Banking Supervision (BCBS or the Committee) established an international standard for measuring capital adequacy for banks, which came to be known as the Basel 1 Accord (also known as the 1988 Accord). One motive for establishing this framework, which is described in detail in BCBS (1988), was to bring consistency to the way banks were regulated in different countries. According to the BCBS, Basel 1 had two basic objectives: (i) to establish a more level playing field for international competition among banks; and (ii) to reduce the probability that such competition would lead to the bidding down of capital ratios to extremely low levels. We will find out that the establishment of an international level playing field is not a good idea and that the very international characteristic of the accord makes objective (ii) unachievable.