Wednesday, July 12, 2017
Gilbert Scott Building - Room 356 (University of Glasgow)
Under Basel III, banks are allowed to apply internal models of risk assessment to certain kinds of assets, which in turn affect the calculation of their capital ratio (i.e. the amount of shareholder equity banks are required to hold for a given amount of assets, adjusted for how risky these assets are). Banks across jurisdictions tend to assign, on average, different weight to the same types of assets. Why do banks weigh risk differently across jurisdictions? Evidence points to the importance of domestic supervisory practices: some banks simply get more lenient treatment than others. Through an in-depth comparative study of capital ratio enforcement in the UK and France, this paper suggests that the degree of stringency in the enforcement of capital ratio requirements has been determined by the industrial strategy of governments after the financial crisis – strategy that was to a large extent shaped by the position of domestic banks in the national economies, and the level of access by top bank managers to government officials. This comparative study builds on data collected through publicly available documentation, internal communications of administrative and business organizations as well as interviews of prominent bankers, policy-makers, and banking regulators and supervisors in France, the UK, and Brussels. The differentiated enforcement of capital ratio requirement across jurisdictions not only undermines the very objective of establishing international standards, but it also fosters unhealthy political dynamics through which governments and banks develop more informal and opaque ways to protect themselves from international rules.
