From Governance to Government?

Basel III and the question of legitimacy of cross-border business regulation

Examination Thesis, 2012

15 Pages, Grade: 1,0


I. Introduction

The global financial crisis of 2008 has inevitably caused intense debates on the conceptual foundations and the practice of global business regulation. There have been widespread calls for more efficient regulation and supervision of the international financial system, and explicitly, of the banking sector. The Basel Committee on Banking Supervision (BCBS), an international standard setting body constituted by national supervisory authorities, has particularly fallen into disrepute. For the German economist Martin Hellwig, the BCBS seemed to be more “an accelerant [to the crisis] rather than an extinguisher”, which “failed marvelously”[1]. One might or might not agree with him, but it remains to state that the question of legitimacy of cross-border business regulation and its efficiency has been increasingly questioned in the aftermath of the financial crisis: “Who governs the globe?”[2] “In whose benefit?”[3] “What of democratic sovereignty?”[4]

Evidently, the future of the BCBS seems to be at stake. Only if its guidelines, based on voluntary recommendations, are perceived as legitimate, the BCBS can continue to exercise its regulatory authority. As Eric Helleiner predicts, financial crisis represent a turning point within the governance of international financial markets: “Regulation may be accompanied by a growing fragmentation of international financial governance over the medium term.”[5] Aart Scholte also summarizes that “the scale, effectiveness, and legitimacy of global governance lag far behind the world’s needs”.[6] In this context this paper will examine i) the sources of authority of the BSCS on the basis of the current Basel Accord, also known as ‘Basel III’, and ii) address the question whether financial regulation can actually be exercised on a global scale or primarily underlies the solely implementation by national governments. The rest of the paper proceeds as follows. Section two begins with a general introduction to the BCBS, its scope of functions and the committee’s embeddedness in the global business regulatory environment. This is followed by the exposition of the main theoretical framework based on the sources of authority by Avant et al. Section five turns to the analysis of Basel III in accordance with the methodological norms of the previously presented theory. Finally, section five provides a conclusion and answers the initially put question of legitimacy of cross-border business regulation.

II. The BCBS and Basel III in the financial regulatory landscape

The BCBS was established by the central bank governors of the G10 countries in 1974.[7] The Committee is located at the Bank for International Settlement (BIS) in Basel, where it convenes on a three-monthly basis.[8] In the course of time, the number of member states has increased to 27 members at present, involving an increasing number of developing countries.[9] With its objective to “enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide”[10], the BCBS is embedded in a complex and opaque network of informal and formal, private and private-public institutions and organizations. Underhill and Zhang describe the extent of cross-border financial regulatory regimes as a heterogeneity, comprising regimes from “transnational policy networks” to “public-private partnerships” to “self-regulatory regimes”[11]. These are, in turn, coordinated by the Financial Stability Board (FSB).[12] Appendix 1 provides a general overview of the financial regulatory landscape.

In contrast to classical multilateral organizations, the BCBS was originally not designed by dint of a legal concept of its founder states. Hence, the Committee does not possess any formal supranational supervisory authority.[13] It is rather characterized by informal mechanisms, which are neither legally bound by a founding treaty, nor by formal rules.[14] Consequently, the BCBS operates “outside international law”[15], which will be discussed in detail in section four. The Basel Committee formulates guidelines, supervisory standards and recommendations of ‘best practice’ to the individual authorities of each member state, who then have the task to implement them into their national systems.[16] Since its foundation, the BCBS has compiled three major sets of global standards which are commonly referred to as ‘Basel Accords’. The governance of banking regulation cannot be understood outside the context in which such standards are developed. On this account, the following part will outline the background and core content of the three Basel Accords.

Basel I: In response to the bankruptcy of 468 commercial banks between 1985 and 1987 and the menacing instability of the global financial system, the governors of the G10 states were prompted to introduce new capital adequacy requirements for the largest credit institutions.[17] As a consequence, the BCBS published a set of minimum capital requirements for banks in 1988, called ‘Basel I’, which aimed at providing banks with a risk buffer in case of massive credit default.[18] Until today the harmonization of equity standards represents the “heart of international banking regulation”[19].

Basel II: The second of the Basel Accords constituted a revision of Basel I rather than a comprehensive reform. The reason for the revision was the manipulation of the Bank of Credit and Commerce International (BCCI), which had withdrawn the access of the supervisory authorities by spreading their capital through separate company shares.[20] There had arisen a gap between market regulation and regulatory practice.[21] With its publication in 2004, Basel II attempted to bring differentiated risk measurements, self-regulation and requirements for transparency into accordance. However, the onset of the financial crisis disclosed simultaneously the weakness and loopholes of the capital-based regulation of Basel II: Reliance on rating agencies, ignoring liquidity and leverage of banks and allowing banks to use internal models to determine regulatory capital requirements might have contributed to the crisis.[22] Some critics even complain that “one of the major reasons for the crisis, the ‘originate-to-distribute’ model, was motivated by Basel I and sustained by Basel II”[23].

Basel III: In reaction to the shortcomings in regulation revealed by the worst financial crisis since the Great Depression, the BCBS found itself forced to refine its regulatory mechanisms fundamentally. The third installment of the Basel Accords was presented in December 2009, reforming the Basel II framework in four major ways: (1) improvement of the quality of capital requirements, (2) increase of equity backing, (3) introduction of global standards of liquidity, and (4) introduction of a leverage ratio as a backstop to risk-based capital.[24] Appendix 3 provides a more in-depth insight into the proposed regulatory framework of the Basel III reform package, which is scheduled to be implemented from 2015 to 2019 by the domestic governments. Already prior to its implementation, Basel III is accused of not addressing some of the deficiencies of its predecessor, such as the systemic risk emerging from moral hazard.[25]

III. Theoretical framework: governance, legitimacy and authority

By referring to the theoretical perspectives of Avant, Finnemore and Sell, different sources of authority of global governors will be illustrated. Initially, this requires a definition of ‘global governance’, a clarification of what ‘global governors’ are and an explanation of what ‘legitimacy’ and ‘authority’ implies.


[1] Financial Times Deutschland. 11. September 2009. “Verein für Sozialpolitik würdigt Martin Hellwig“.

[2] Avant et al. (2010)

[3] Mattli/Woods (2009)

[4] Braithwaite/Drahos (2000)

[5] Helleiner (2009): 21.

[6] Scholte (2011): 14.

[7] Bank for International Settlement (2009)

[8] Bundesministerium für Finanzen (2012)

[9] Bank for International Settlement (2009)

[10] Bank for International Settlement (2009)

[11] Underhill/Zhang (2008): 535.

[12] Until April 2009 its official name was ‘Financial Stability Forum (FSF)’.

[13] Underhill/Zhang (2008): 539.

[14] Porter (2005): 34.

[15] Kerwer (2005): 619.

[16] Financial Stability Board (2012)

[17] Becker et al. (2007): 119.

[18] Speyer (2006): 110.

[19] Frey (2006): 105.

[20] Krajewski (2006): 825.

[21] Speyer (2006): 111.

[22] Moosa (2010): 111.

[23] Moosa (2010): 95.

[24] Financial Service Authority (2012)

[25] Ponte et al. (2011): 50.

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From Governance to Government?
Basel III and the question of legitimacy of cross-border business regulation
Copenhagen Business School  (Department of Business and Politics)
International Political Economy
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ISBN (Book)
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from, governance, government, basel
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Lars Oehler (Author), 2012, From Governance to Government?, Munich, GRIN Verlag,


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