The Basel Committee on Banking Supervision (or Basel Committee for short) plays a leading role in standardizing bank regulations across jurisdictions. Its origins can be traced to June 26, 1974, when German regulators forced the troubled Bank Herstatt into liquidation. That day, a number of banks had released payment of German marks to Herstatt in Frankfurt in exchange for US dollars that was to be delivered in New York. Because of time-zone differences, Herstatt ceased operations between the times of the respective payments. The counterparty banks did not receive their dollar payments.
Responding to the cross-jurisdictional implications of the Herstatt debacle, G-10 countries and Luxembourg formed a standing committee under the auspices of the Bank for International Settlements (BIS). Called the Basel Committee on Banking Supervision, the committee comprises representatives from participant nations’ central banks and regulatory authorities. Over time, the focus of the committee has evolved, embracing initiatives designed to:
- define roles of regulators in cross-jurisdictional situations;
- ensure that international banks or bank holding companies do not escape comprehensive supervision by a “home” regulatory authority;
- promote uniform capital requirements so banks from different countries may compete with one another on a “level playing field.”
The Basel Committee’s does not have legislative authority, but participant countries are expected to implement its recommendations. Mostly they do. Also, the committee sometimes allows for flexibility in how local authorities implement recommendations, so even when recommendations are implemented, national laws vary.
In recent decades, the Basel Committee’s has focused on developing a uniform system of bank capital requirements, called the Basel Accords. Work commenced with a 1988 Basel Accord, which is today called Basel I. That set minimum capital requirements for banks’ credit risk. A 1996 amendment added capital charges for market risk. Starting in 1999 and continuing into the early 2000s, the Basel Committee developed an overhaul of Basel 1, which is called Basel II. Implementation of Basel II was nearing completion when the 2008 financial crisis hit. With governments bailing out numerous financial institutions, it was clear the Basel Accords were inadequate. The Basel Committee responded with a number of stopgap measures, which have been called Basel 2.5, followed by a longer-term overhaul of bank capital requirements, which is called Basel III.
The failure of the Basel Accords to prevent financial crises in either 2000-2001 or 2008 raises concerns. Some have come to view the Basel Committee as a bankers’ club, populated by central bankers and regulators who either hale from or are otherwise beholden to the banking industry. The focus of the Basel Accords has always been on regulating bank capital and not bank practices. But capital requirements cannot protect against the sorts of abuses that came to light in the two recent financial crises. The fact that the Basel Committee continues to fine tune an approach that may be fundamentally inadequate—and the fact that they operate in a way designed to preempt initiatives by national legislators—raises the obvious question of whose interests the Basel Committee is protecting: bankers’ or society’s?
-  The G-10 was actually eleven countries: Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States.