Basel II: Good or Bad Regulations

There are numerous studies within the field of banking regulations and supervision on banking crises from regulators and standard setters’ perspective but little has been written on the subject from bankers’ perspectives. More precisely, little has been written on what exactly constitutes good or bad regulations from bankers’ perspectives rather than from regulators, standard setters or academicians’ perspectives. The above questions motivated us to study the structure, design, objectives and implementation of Basel II in Bahrain. An investigation carried out from the perspective of institutions being regulated via questionnaires, one-on-one interviews, and examination of banks’ annual reports. The main objective in this study is to examine whether Basel II regulations are good or bad regulations. Coming up with an answer to that question requires addressing two preliminary questions: how do you define good or bad regulations and what is the scope of examination. Examining whether Basel II regulations are good or bad needs an assessment of the implementation of the Basel II across all the Basel II-compliant countries. Carrying out this task is not logistically possible for the time being. I, therefore, chose the Kingdom of Bahrain, a Basel II-compliant country as a case to study in this book. Furthermore, in this book I explore whether the Basel II regulations have achieved the CBB objectives of adopting Basel II, which include a) assisting banks in enhancing their risk management functions, b) assisting the stabilization of the banking system, and c) improving the financial and non-financial health of the banks. The study found that the general perception of the interviewees and the survey’s respondents has been that Basel II regulations do not help banks withstand financial crises, improve risk management practices, reduce systemic risk, or improve international competitiveness. Furthermore, the study found that the regulator ignored the idiosyncratic nature of the banking system and its constituents while implementing Basel II regulations