Bank Regulation Pre-1988

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.