Economic Crises Case Study

2008 Financial Crisis: Need for Basel Committee to Evolve as a Global Regulatory Authority

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Abstract:
The 2008 financial crisis, with its origins in the 'Sub-prime Mortgage Crisis' in the US, had impacted financial markets and economies worldwide. The inter-bank dealings of the US banks with banks across borders left the global banking industry in disarray. The effect of the sub-prime mortgage crisis on the US financial sector was much greater and graver. With the deficiencies in their respective regulatory frameworks exposed, the governments of several nations made attempts to limit the damage caused by the financial meltdown. Given the international character of the crisis, the required solutions would also have to be global. In this context, the call for a global regulatory banking authority gained momentum. The Basel Committee, which is a forum for central bankers of member nations, has been an advisory body for the banking industry since 1930. Currently, the implementation of prudential norms recommended by the Basel Committee is voluntary, as there is no legal authority for the Basel Committee to enforce the same. In fact, many member countries did not fully implement Basel II norms and strangely, the US is still following Basel I norms. In the wake of the 2008 financial crisis, there is a call to make the Basel Committee a regulatory authority. Can the Basel Committee emerge as one such authority not only for healing the wounds caused by the financial crisis, but also ensuring against occurrence of such an event in the future? What challenges lie ahead for the Basel Committee to evolve into an independent global banking regulatory authority?

Pedagogical Objectives:

• To understanding the US financial meltdown and its impact on the global banking industry
• To outlining the shortcomings of the existing regulatory frameworks and the call for a global banking regulatory authority
• To analysing the success and failure of the Basel Committee Norms as an advisory body and the challenges that lie ahead for its transformation into a regulatory authority

Keywords : Basel norms, Financial crisis, Regulation, Capital adequacy, Pillars, Basel Accord, Supervision, Banking supervisory control, Global regulatory authority, International co-operation, Mark-to-market accounting, Glass-Steagall Act, Gramm-Leach-Bliley Act