Basel and the IASB: Legitimacy Interdependencies and Consequences for Prudential Regulation

Abstract

If supranational public and private actors establish rules and standards, then it is of great concern whether those rules and standards have democratic legitimacy. The literature offers different measures to overcome these legitimacy concerns, such as the active participation by relevant stakeholders, the proportionality the standards produce, and the transparency toward the specific stakeholders and the public. Ensuring democratic legitimacy is already a major challenge for a single set of rules or standards. So how can a supranational body design rules that rest on the standards of another supranational standard setter? This study examines the legitimacy concerns from the interaction of supranational standard setters that have different objectives. Therefore, I investigate the legitimacy of prudential regulation based on the capital adequacy in the Basel Committee on Banking Supervision (BCBS) that relies on the financial accounting standards set by the International Accounting Standards Board (IASB). The results show flaws with respect to legitimacy in the regulatory process and how the prudential regulator reacts to shortcomings to ensure a higher degree of legitimacy in prudential banking Regulation.