Connecting National Safety Nets: the Dialectics of the Basel Ii Contracting Process

CONNECTING NATIONAL SAFETY NETS: THE DIALECTICS OF THE BASEL II CONTRACTING PROCESS Edward J. Kane Boston College Dialectics is the art or practice of trying to reconcile contradictory ideas. Contracting is a sequential process that employs the dialectics of multiparty give and take to fashion a deal that -to a mutually acceptable degree -can accommodate the contradictory interests of the dealmakers. The essence of contracting is to allocate a balance sheet of particular rights and duties to each counterparty. Whenever a contract assigns some parties options to reinterpret or breach their duties under unspecified circumstances, the contract is incomplete. Basel II consists of a collection of strategic supervisory guidelines negotiated by representatives of central banks and national regulatory commissions that were members of the Basel committee on Banking Supervision (BCBS) in the decade leading up to June 2004. The BCBS developed as a cross-country regulatory response to the globalization of financial institutions and markets, which would otherwise connect national safety nets in an uncontrolled way. It meets on a regular basis to discuss emerging regulatory issues and to explore ways of harmonizing national standards for banking supervision. It is fair to say that multinational banks are greater fans of harmonization than regulatory officials are. Banks see harmonization as a way to increase the efficiency of