Why is the Basel Regulatory Framework Not Necessarily a Universal Panacea?

Abstract

In this article, we argue that banking regulators under the Basel regulatory framework could benefit from the capital requirements in terms of reducing the likelihood of insolvency of banks, but these standards have possible ill-effects for other important objectives of banking regulations: in particular, the Basel framework does not necessarily contribute to the improvement of financial intermediation and accumulation of credit risk management skills in the monitoring process. Moreover, blind adoption of the Basel regulatory framework in most of the developing countries, where the preconditions are largely absent, creates adverse consequences on economic activity. We raise related experiences from Japan, Indonesia and Sri Lanka.