Friday, January 27, 2017

Turk: The Banking-Sovereign Nexus: Law, Economics & Policy

Matthew C. Turk (Indiana Univ., Bloomington - Kelley School of Business) has posted The Banking-Sovereign Nexus: Law, Economics & Policy (Columbia Journal of Transnational Law, forthcoming). Here's the abstract:

This article examines a previously overlooked policy interdependence between the International Monetary Fund (IMF) and the Basel Committee on Banking Supervision (Basel Committee), which results from economic dynamics associated with the “banking-sovereign nexus.” The failure of legal scholarship on international financial regulation to address the banking-sovereign nexus represents a substantial oversight because linkages among private banking sectors (subject to the Basel Committee’s regulations) and the public finances of sovereign governments (under the purview of the IMF) have historically been a leading source of instability in the global financial system.

The main finding of this article is that interventions by the IMF and the Basel Committee function as regulatory complements by subtly reinforcing one another through a number of channels. In order to leverage that complementarity, the article presents the following two-part policy proposal. First, that the Basel Committee enhance the stringency of its capital requirements with an increase in the risk-weights that are assigned to sovereign bonds that banks hold as assets. Second, that the IMF revise its lending criteria to allow countries that have effectively implemented the stricter version of the Basel Rules to prequalify for access to its credit facilities. The broader contribution of this article is to provide a more integrated perspective on the international financial architecture, which looks across formal legal categories to identify functional relationships between markets and regulations that affect how the system operates as a whole.