Bank Regulation Pre-1988

What is the main purpose of the Basel Committee on Banking Supervision (BCBS)?

How does the Basel Committee achieve its goals?

What is the nature of the Basel Committee's decisions in terms of legal force?

Why does the Basel Committee exchange information on banking sector developments?

Which entity enforces the Basel Committee's recommendations?

What was the primary reason for the Basel Committee meeting in 1987?

What was a major issue with bank regulation prior to 1988?

Which of the following statements about bank failures is true?

What is the significance of Basel in the context of the Basel Committee?

What was a major factor contributing to the increased risk of bank bankruptcies in the 1980s?

When did the Basel Committee originate?

Basel Committee on Banking Supervision (BCBS)

The main purpose of the BCBS is to enhance financial stability by improving the regulation, supervision, and practices of banks worldwide.
The BCBS achieves its goals by setting global standards for banking regulation, promoting dialogue and cooperation among member countries, and monitoring their implementation.

Decision-Making and Enforcement

The BCBS's decisions do not have legal force, but rather serve as guidelines for national regulatory authorities.
National regulatory authorities are responsible for enforcing the BCBS's recommendations.

Information Exchange and Risk Assessment

The BCBS exchanges information on banking sector developments to identify and address potential risks and vulnerabilities.
This information exchange helps to prevent and mitigate systemic crises.

History and Background

The BCBS was established in 1974 as a response to disturbances in the international financial system.
The primary reason for the BCBS meeting in 1987 was to address the inadequacy of bank capital adequacy requirements.
Prior to 1988, a major issue with bank regulation was the lack of common standards for capital adequacy.
Bank failures can have a contagious effect, leading to broader financial instability.
Basel is significant in the context of the BCBS as it is the city where the Committee holds its meetings and is often used as a shorthand to refer to the Committee's standards and guidelines.
A major factor contributing to the increased risk of bank bankruptcies in the 1980s was the rapid expansion of lending and the subsequent deterioration in asset quality.

Test your knowledge on how banks were regulated pre-1988, focusing on balance sheet measures, capital ratios, regulatory arbitrage, enforcement variations, increasing bank leverage, and off-balance sheet derivatives trading.