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The authors would like to thank Hugo Bänziger, Harold James, Ralf Leiber, Per Hansen, Jonathan McQuarrie, Clifford Smout, Daniel Zuberbühler and the other participants at the June EABH seminar on financial risk management hosted in Zurich by Swiss Re. The article also benefitted substantially from comments and suggestions by two anonymous referees. Any errors remain ours.
It is not clear that anything would have been different in the 2007-2009 crisis had Basel III already been in place.
(Admati and Hellwig 2013: 96)
As finance has become more complicated, regulators have tried to keep up by adopting ever more complicated rules. It is an arms race that underfunded government agencies have no chance to win.
(Kenneth Rogoff, The Guardian, 10 September 2012)
I
This year marks the 41st anniversary of a series of bank failures, part of financial disruptions commonly associated with the breakdown of the Bretton Woods system. In summer 1974, two challenges in particular contributed to the bankruptcy of several banks on both sides of the Atlantic, raising problems for which financial regulators were ill-prepared and for which there was little or no helpful historical precedence. First, increasing inflation and volatile foreign exchange rates stimulated demands for financial products to control risk (Eichengreen 1996, p. 142). Second, inflation and petrol dollars added greatly to bank liquidity and transformed its nature.
Though not the first period of central bank cooperation, the 1970s witnessed an upsurge of efforts to agree international banking rules, the birth of the Basel Accords, which have become the principal avenue for international and national bank regulation. Today, however, seven years after the 2008 Banking Panic, many observers are not satisfied with the extent and quality of bank oversight, as the above comment by Rogoff suggests (see also Admati and Hellwig 2013; Haldane and Madouros 2012).1There is substantial evidence that the number of worldwide banking crises, their severity, and cost to society, including government bailouts, have increased since 1970 (Calomiris and Haber 2014). At the very least, the Basel Accords have had a decidedly mixed record of stemming the tide of financial instability.
We provide a broader picture of the forces that finally shaped these rules over several decades, in particular the Basel I regulations or Cooke ratio,...