Basel II through the eyes of Rousseau

Basel II has been a revolutionary document, but it is also a revolutionary process. Suddenly, regulators are expected to consult with industry before drafting rules. In many countries, consultation was unheard of before Basel II rolled into town.

This hit me when I was attending the Institute of International Finance's spring membership meeting in Madrid. Certainly, the IIF is just one trade associations working with regulators. But there was something in the air there.

Jean Jacques Rousseau, the 18th century philosopher, said: "The people, being subject to the laws, ought to be their author: the conditions of society ought to be regulated solely by those who come together to form it."

Now, no-one would ever argue that banks should be in charge of their own regulation. For example, many firms earned big bucks devising ways to get around Basel I. But now that they have had a hand in building Basel II, they have more of an incentive to abide by its code.

Regulators have also learned the importance of listening – that their ideas for supervision can often have unintended consequences in the 'real world'. And that with a bit of dialogue, the regulators can often accomplish what they intend to, much more effectively. This new dialogue is, indeed, a platform for a 21st century financial system.