The unintended consequences of regulatory import: the Basel Accord’s failure during the financial crisis

ABSTRACT

This article examines to what extent regulatory import (RI), a common, but understudied mode of governance in regime complexes, was a separate factor of the global financial crisis in 2008. RI describes a specific mode of governance that occurs when regulators explicitly incorporate functionally important governance from an external forum to their own regulations, thus making their own performance dependent on external agency. While RI is associated with benefits, such as specialisation, it could cause unintended consequences. The one-sided dependence on external authority could result in the import of non-complementary governance or regulatory failures and undermine the regulator’s performance. We illustrate our argument with the Basel Committee on Banking Supervision that imported governance authority from the International Accounting Standards Board and credit rating agencies. The paper finds two negative consequences of RI for the Basel Committee’s regulatory performance in the 2008 financial crisis. First, uncoordinated changes of accounting rules increased pro-cyclical effects that exacerbated the banking crisis. Second, import of credit risk measurement from credit rating agencies led to misjudgement of risk exposure.

KEYWORDS:

• regime complexes
• indirect governance
• Basel Committee on Banking Supervision
• global financial crisis
• International Accounting Standards Board
• credit rating agencies

Acknowledgments

We thank Thomas Gehring, Thomas Rixen, Eva Ruffing, Kevin Urbanski, Nikolaus Jopke and the anonymous reviewers for many helpful comments and suggestions.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes on contributors

Manuel Becker is a lecturer and PhD candidate at the Otto-Friedrich-University of Bamberg. He has a research interest in international regulation, private authority and regime complexes.

Simon Linder is researcher at the Otto-Suhr-Institute of Political Science in Berlin. His research interests are institutions in global financial regulation and the economic and political effects of global financial regulatory output.

Notes

1 The G4+1 comprise the accounting authorities of Australia, Canada, New Zealand, the United Kingdom and the United States.

2 However, the evidence on the negative effect of the issuer pay method on rating behaviour in the economic literature is mixed, e.g. Bonsall (2014); Xia (2014).

3 https://www.bis.org/bcbs/ifrs_bcbs_mou.htm.

Additional information

Funding

This work was supported by Deutsche Forschungsgemeinschaft: [Grant Number 638640].