A Synthesis: Redistributive Cooperation: Market Failure, Wealth Transfers, And the Basle Accord Thomas Oatley & Robert Nabors

Abstract

This paper argues that the creation of the Basle Accord corresponds more to a rent-seeking than to a market failure logic. As mentioned in the paper, for understanding the same, models are needed that explain why governments propose international institutions in one issue area rather than another, why they create international institutions at one time rather than earlier or later, and why, when they do propose an international institution, they propose one set of rules rather than another. The paper starts with a literature review. As mentioned in the paper, the origins of the Basle Accord, according to Kapstein, lay in the consequences of international financial integration. International financial integration, by raising systemic risk and limiting regulators’ capacity to ensure the soundness of banking systems, generated a market failure evidenced by the debt crisis In short, the presence of a financial market failure revealed by the debt crisis induced policymakers to create mutually beneficial international regulations. Kapstein’s explanation of the Basle Accord, is a direct application of theories of international cooperation. This article challenges Kapstein’s account of international capital adequacy regulation. It is suggested that the Basle Accord is an instance of redistributive cooperation: the creation of an international institution that intentionally reduces at least one other government’s welfare compared to the status quo. The paper is divided broadly into three parts. First, a model is presented based on positive theories of regulation in which domestic politics create incentives to propose redistributive international institutions. Second, it is shown how governments can achieve international redistribution within the voluntary international agreements. Third, the model is applied to the Basle Accord.