Evaluating the policy implications of the other two pillars of Basel II

This brief evaluates the supervisory-process and market-discipline pillars of the Basel II bank regulatory framework.

It reviews and critiques their fundamental features and reaches three conclusions. First, the supervisory-process pillar provides too much scope for supervisory discretion and almost no support for a rules-based approach to regulation that arguably would be much more effective in promoting bank safety and soundness. Second, the market-discipline pillar's information-disclosure guidelines represent a useful first step for many nations with less-developed banking systems, but these costly