- Arons, Matthew [Browse]
- Senior thesis
- 125 pages
- Keohane, Robert [Browse]
- Woodrow Wilson School of Public and International Affairs [Browse]
- Class year
- Restrictions note
- Walk-in Access. This thesis can only be viewed on computer terminals at the Mudd Manuscript Library.
- Summary note
- Explaining states’ ability to cooperate in a world defined by anarchy is one of the
core puzzles of international relations. Since 1974, the Basel Committee on Banking
Supervision has issued regulations governing global banking. Despite often acrimonious
negotiations, the committee has produced three major agreements on capital adequacy
standards. This thesis seeks to determine when and why international harmonization of
banking regulation occurs. I ask two questions: First, when do national regulators support
international harmonization? Second, how are regulators’ preferences translated into
I argue that states are most likely to support international harmonization when
bank stability and competitiveness are declining. Regulators face a difficult dilemma –
regulations that strengthen the financial system also reduce banks’ competitiveness.
Building on the work of David Andrew Singer, I argue that the regulator must choose
policies that satisfy the legislature’s minimum thresholds for these two variables.
Declining stability and competitiveness shrink the regulator’s win set. Therefore,
regulators are forced to seek international harmonization in order to achieve their
domestic political ends. At the bargaining table, power determines the ultimate shape of
the agreement. Power in Basel Committee negotiations is a function of asymmetric
interdependence. By threatening to exclude weaker states from their financial markets,
the powerful are able to get their way.
I use a process-tracing methodology to test this theory against all three Basel
Accords. While Basel I has received significant attention in the scholarly literature, Basel
II and Basel III are comparatively under-researched. In the late 1980s, US and UK banks
were increasingly unstable. Moreover, lightly regulated Japanese banks were quickly
gaining market share. In response, the United States and the United Kingdom supported
Basel I, simultaneously increasing stability and leveling the playing field. By the mid-
1990s, stability and competitiveness were on the rise in both the United States and
Europe. Therefore, Basel II weakened capital requirements. Basel III negotiations are
reminiscent of Basel I. In the aftermath of the 2007–2008 financial crisis, the United
States supported stricter regulations but feared the competitive consequences. Over the
objections of France and Germany, the United States pushed through stronger
international rules. This theory of international regulation explains how cooperation
occurs, but it also points to the limitations of the resulting agreements.