Banking on Stability: The Political Economy of New Capital Requirements in the European Union

Abstract

The Basel III Accord on a ‘Global regulatory framework for more resilient banks and banking systems’ was issued in late 2010 as the cornerstone of the international regulatory response to the global financial crisis. Its adoption into European Union (EU) legislation has, however, been met with considerable member state reticence and intra-EU negotiations are ongoing. This paper investigates the political economy of new capital requirements in the EU, arguing that the institutional features of national banking sectors convincingly account for the divergence in EU member state preferences on capital rules.

Key words:

• Banking regulation
• European Union
• capital requirements
• Basel III

Notes

1. Capital represents the portion of a bank’s assets which have no associated contractual commitment for repayment. It is, therefore, available as a cushion in case the value of the bank’s assets declines or its liabilities rise.

2. Liquid assets are cash or any other negotiable assets that can be quickly converted into cash.

3. There are wider questions being asked about the whole foundation on which the Basel agreement is built — i.e., risk weighted assets — hence the desire for the leverage ratio which looks at overall assets.