When is best practice good enough?

A dramatic change in banking regulation has been the move from prescriptive procedures towards ‘best practice’ risk management. Disagreements about how quickly the new approach can be applied to credit risk is central to arguments about revising Basel II.

Throughout much of the ninteenth century, banking regulation in most countries was fragmented and often ineffective. Gradually, a consensus emerged that the social damage from the failure of financial institutions and periodic monetary crises required stricter and more co-ordinated supervision. This view was reinforced during the great depression with the introduction of deposit insurance. At that point, the public sector, and ultimately the taxpaying public at large, had a clear financial stake