The unintended consequences of regulatory import: the Basel Accord’s failure during the financial crisis

Abstract

ABSTRACT This article examines to what extent regulatory import (RI), a common, but understudied mode of governance in regime complexes, was a separate factor of the global financial crisis in 2008. RI describes a specific mode of governance that occurs when regulators explicitly incorporate functionally important governance from an external forum to their own regulations, thus making their own performance dependent on external agency. While RI is associated with benefits, such as specialisation, it could cause unintended consequences. The one-sided dependence on external authority could result in the import of non-complementary governance or regulatory failures and undermine the regulator’s performance. We illustrate our argument with the Basel Committee on Banking Supervision that imported governance authority from the International Accounting Standards Board and credit rating agencies. The paper finds two negative consequences of RI for the Basel Committee’s regulatory performance in the 2008 financial crisis. First, uncoordinated changes of accounting rules increased pro-cyclical effects that exacerbated the banking crisis. Second, import of credit risk measurement from credit rating agencies led to misjudgement of risk exposure.