Basel II and Subprime Crisis: The Balkanization of Regulations


Ersoy İ. S.

Structural and Regional Impacts of Financial Crises Proceedings of 12th International Conference on Finance and Banking, ss.162-175, 2009 (Düzenli olarak gerçekleştirilen hakemli kongrenin bildiri kitabı)

  • Yayın Türü: Makale / Tam Makale
  • Basım Tarihi: 2009
  • Dergi Adı: Structural and Regional Impacts of Financial Crises Proceedings of 12th International Conference on Finance and Banking
  • Sayfa Sayıları: ss.162-175

Özet

The Basel framework is blamed for exacerbating the sub-prime crisis and suggestions range from revising Basel II to the establishment of Bretton Woods II. BIS responded the blames by accusing the “Balkanization of the regulations” and started revising Basel II. The aim of the paper is to investigate the source of fragmentation in Basel II implementations. To this end, the paper investigates the decisions of the EU members and Turkey in the implementation of Basel II Standardized Approach for credit risk that are left to national discretion. The findings of the paper suggest that “Balkanization” in the EU and in Turkey is the outcome of discretions left to national jurisdiction by the BCBS of BIS. The fragmentations in the implementations of the EU members are apt to create regulatory arbitrage. Turkey’s assigning 0% risk weight ie to government borrowing in local currency; despite the fact that heavy government bond leverage was the main reason behind the 2001 crises, depicts the weaknesses of Basel II in protecting countries from possible crisis. The paper suggest that the BRSAs should be the responsible authority to take precautions against the idiosyncratic characteristics of the country, the banks, and the long-debated drawbacks of Basel II, while the Central Banks should be responsible from the macro prudential regulation and supervision.