The Internal Ratings-Based and Advanced Measurement Approaches for Regulatory Capital Under the ‘Basel Regime’

Chapter 6 describes perhaps the most prominent – and most important– initiative in banking markets since the late 1980s – the development and promulgation of guidelines by the Basel Committee on Banking Supervision. The Basel Committee is comprised of regulators and central bankers, and thus can be considered an aspect of governmental rather than private regulation. However, the Basel Committee's operations are effectively similar to those of private regulation and enforcement in certain respects. The committee itself has no formal governmental role; its function is to develop and promulgate ‘guidelines' – recommendations for best practice – which in themselves have no force of law. The guidelines become effective, legally, only when adopted and enforced within the context of a country's domestic banking regulation. Moreover, the guidelines themselves give considerable scope for self-regulation, since they rely heavily on internal modeling, processes and risk assessments by the financial institutions that they are designed to regulate. The chapter offers a detailed examination of two aspects in which the Basel process relies on self-regulation by banks subject to its strictures: the Basel Accords' Internal Rating Based Approach to credit risk and the Advanced Measurement Approach to operational risk. In addition describing the regulatory regime of public-private ordering the chapter examines the ways in which these recommendations were designed, implemented and enforced, with special reference to the assessment dimensions of legitimacy, quality, accountability, and independence