Incentive Conflict in the International Regulatory Agreement on Risk-Based Analysis
Edward J. Kane
Intergovernmental regulatory cooperation is fundamentally cartel
behavior and subject to principal-agent conflict. In negotiating the 1988
risk-based capital agreement, most Western officials' unstated goal may
arguably be described as postponing the pain of adapting their domestic
regulatory schemes to successor officials' watch. They hoped they could buy
time by raising book-value capital requirements for Japanese banks.
Efficient-market theory indicates that the market value rather than the
book value of a bank's capital impacts its funding cost. It also clarifies
that restrictions on domestic and foreign bank competition for Japanese
deposits unfairly enhance Japanese banks' ability to intermediate that
country's massive capital exports.
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