Impact of the 1988 Basle Accord on International Banks

Abstract

The ostensible purpose of the Basle Accord was to standardize bank-capital regulations among the twelve leading industrial countries. Its ulterior goal was to "level the playing field" by eliminating a funding-cost advantage of Japanese banks that had allowed them to capture more than one-third of international lending. The wealth gain for Japanese bank shareholders was 31.63 percent. Wealth effects for shareholders of non-Japanese banks were not significant. These results suggest that the Basle Accord did not eliminate the pricing advantage of Japanese banks, challenging the non-Japanese regulators' contention that the regulation would help level the playing field. THE BASLE ACCORD WAS a landmark regulatory agreement; for the first time, regulations affecting banks in many different countries were jointly established. Agreement was reached on July 12, 1988 concluding fifteen months of negotiations conducted by members of the Basle Committee on Banking Supervision.' The ostensible goals of the Basle Accord were to reduce the risk of the international banking system and to minimize competitive inequality that arises from differences among national bank-capital regulations. Its ulterior goal was to eliminate the funding-cost advantage of Japanese banks that allowed them to capture more than one-third of international lending during * The author gratefully thanks Rend Stulz for his comments that substantially improved the empirical model and hypotheses tested in this paper, Edward Kane for his many thoughtful comments and insights that helped to focus and refine the research, and anonymous referees for their helpful suggestions that improved the paper's overall quality. The author also thanks James Ang, S. The Journal of Finance the 1980s.2 The Basle Accord was a major change for the regulatory system of many of the signatory countries with unknown consequences for the competitiveness of their banks.3Even though the impact of the Basle Accord on bank competition is not known, the regulation has become the standard for financial services regulators throughout the industrialized world. Cooke (1991) reports that as of 1990, nineteen countries were planning to use the new methodology in regulating their banks. Moreover, the methodology applies to all financial intermediaries in the European Community (EC) and is being extended to the insurance and securities industries in North America and Japan. Because of the Basle Accord's foundational role in establishing this new regulatory regime, it is critical for financial services regulators, managers and shareholders to understand its effect on international bank competition and whether it accomplished its goals. To this end, this article addresses the Basle Accord's effect on the competitiveness of international banks.Because regulatory theories have developed in a single-country context, no one theory of regulation provides a satisfactory explanation for the motivations behind the Basle Accord. However, several different theories do provide insights into certain aspects of ...

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