Exploring how "smart" the Basel II framework is in the Australian context of banking reform

Li, Siqiwen (2010) Exploring how "smart" the Basel II framework is in the Australian context of banking reform. PhD thesis, The University of Newcastle.

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This thesis evaluates the effectiveness of Basel II as a regulatory framework in the Australian context of banking reform. More specifically, the thesis draws on a range of economic theories to establish a distinction between risk and uncertainty, explain both the causes and consequences of financial instability, and investigate the structure of, and policy responses to major financial crises.

In this context, the thesis investigates the congruence between Basel II framework and the attributes of Responsive and Smart Regulation. While the thesis argues that Basel II can be regarded as a good example of 'smart' regulation, it highlights areas of weakness and potential danger. In particular, it raises concerns about procedures of risk-management that are based on internal modelling using the Value-at-Risk (VaR) approach, as required under Basel II. It examines ways in which techniques of quantitative analysis can be enhanced to accommodate uncertainty through the use of robust techniques that account for time-varying uncertainty premia. However, within an environment characterised by increasing financial instability, the parameters that determine deep structures of self-similarity in the stochastic processes of different assets, will themselves be shifting so that the relevant asymptotic densities become more fat-tailed and negatively skewed.

This thesis applies the Universal Pragmatics methodology developed by Jurgen Habermas for interpreting both relevant documents and the responses of interviewees. The validity claims highlighted in Habermasian discourse analysis are adopted as benchmark for normative evaluations of interviewee responses. This methodology is applied to transcripts of semi-structured interviews that have been designed to extract relevant information from both risk managers in the banking sector and supervisors from the regulatory authorities in Australia.

The research findings arising from an analysis of interviews show the superiority of Basel II in contrast to Basel I, and also supports the determination of those aspects of Basel II that are more or less effective. This process highlights a range of problematic issues arising from Basel II, in regard to risk management and supervisory practices, which need to be addressed by policy-makers, supervisors, and bank practitioners in the future.

In particular, the thesis concludes that a more effective prudential control of the entire financial market and an improved system of corporate governance in the banking sector, are important complements to Basel II for the purpose of stabilising financial markets and obtaining sustainable economic growth in the Australian economy.

Item ID: 17722
Item Type: Thesis (PhD)
Keywords: Basel II framework, banking reform, financial instability, Australian economy
Date Deposited: 16 Jan 2013 04:18
FoR Codes: 15 COMMERCE, MANAGEMENT, TOURISM AND SERVICES > 1502 Banking, Finance and Investment > 150203 Financial Institutions (incl Banking) @ 50%
14 ECONOMICS > 1401 Economic Theory > 140102 Macroeconomic Theory @ 20%
15 COMMERCE, MANAGEMENT, TOURISM AND SERVICES > 1502 Banking, Finance and Investment > 150205 Investment and Risk Management @ 30%
SEO Codes: 90 COMMERCIAL SERVICES AND TOURISM > 9001 Financial Services > 900101 Finance Services @ 60%
91 ECONOMIC FRAMEWORK > 9101 Macroeconomics > 910105 Fiscal Policy @ 15%
91 ECONOMIC FRAMEWORK > 9101 Macroeconomics > 910109 Savings and Investments @ 25%
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