NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Basel II: A Contracting Perspective

Edward J. Kane

NBER Working Paper No. 12705
Issued in November 2006
NBER Program(s):   CF

Financial safety nets are incomplete social contracts that assign responsibility to various economic sectors for preventing, detecting, and paying for potentially crippling losses at financial institutions. This paper uses the theories of incomplete contracts and sequential bargaining to interpret the Basel Accords as a framework for endlessly renegotiating minimal duties and standards of safety-net management across the community of nations. Modelling the stakes and stakeholders represented by different regulators helps us to understand that inconsistencies exist in prior understandings about the range of sectoral effects that the 2004 Basel II agreement might produce. The analysis seeks to explain why, in the U.S., attempting to resolve these inconsistencies has spawned an embarrassingly fractious debate and repeatedly pushed back Basel II's scheduled implementation.

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This paper was revised on March 26, 2007

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Document Object Identifier (DOI): 10.3386/w12705

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