FROM BRETTON WOODS TO BASEL II

De Boeck Supérieur | « Finance & Bien Commun »

2005/1 No 21 | pages 5 à 8
ISSN 1422-4658
DOI 10.3917/fbc.021.0005
Article disponible en ligne à l'adresse :
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 5
From Bretton Woods It seems likely that, after years’ of discus-
sion, consultation and evaluation, the so-
called Basel II accords are shortly to come
to Basel II into force. If these accords are implement-
ed, they will signal approval and validation
of the fact that the logic underpinning international financial and monetary relation-
ships has shifted. Because of its extreme technical complexity, Basel II is above all
considered to be a raft of measures that will impact on inter-bank competition as well
as altering banks’ relationships with their customers. There is, however, more to Basel
II. It is the symptom of the new finance paradigm, the details of which are progres-
sively emerging.
From a systemic viewpoint, Basel II in essence sanctions a series of fundamental
changes that have arisen in the global finance sector and, in the footsteps of the 1944
Bretton Woods agreements, prepares the ground for a different system operating ac-
cording to new principles of cohesion. The enactment of Basel II may thus signify the
end of the long period of transition that began with the erosion and 1971 collapse of
the global monetary and financial system inaugurated at Bretton Woods in 1944. After
a period of almost forty years of a non-system governed by trial and error and ad hoc
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EDITORIAL / ÉDITORIAL
 6
arrangements, the horizon holds the promise of a new cohesion. In this context, Basel
II is the most visible element of several initiatives and codes having arisen since the
1990s which the Financial Stability Forum has attempted at bringing together; what
place there is within this framework for the common good remains to be seen.
The Bretton Woods system was predicated on the hypothesis of the almost complete
independence of national financial systems. The only links between national systems
were payments made in the course of trade and the cross-border activities of a few
merchant banks. Furthermore, the authorities considered there to be an unambigu-
ous distinction between matters of internal and external regulation, all the more so
as management of fixed exchange rate policies was the exclusive domain of central
banks. Over the 35-year period that separates us from 1971, the distinction between
financial regulation’s internal and external spheres has become devoid of all mean-
ing: interdependence has replaced independence. The system envisaged under Basel II
takes this interdependence as its starting point and, in place of separation, proposes a
cross-pillar approach to national regulators’ spheres of intervention. Globalised tran-
snational banks lie at the very heart of the new system’s logic.
The Bretton Woods system was designed to govern a world where, for every dollar
traded in the so-called real economy, the volume of financial transactions (national
and international) did not exceed a handful of cents. The situation today is the exact
opposite; for every dollar’s worth of financial transactions, national and international
real transactions represent - at best - twenty cents. The 44 States engaged against Nazi
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Germany gave the Bretton Woods conference an unambiguous mandate to imagine
the global institutional framework best able to nurture the harmonious development
of international trade, which was perceived as being the best hope for global peace and
prosperity. At the time, memories of the infernal spiral of protectionism and devalu-
ation witnessed during the 1930s and its contribution to international conflict were
still strong. The Bretton Woods system took the principle of free trade as the basis
for its cohesion, with monetary and financial arrangements explicitly at the service
of trade-related payments and transfers. International trade does not form part of the
Basel II agenda for the simple - and good - reason that financial activities are evidently
autonomous. Paradoxically, Basel II does have important implications for the negotia-
tions on liberalisation of the trade in services, currently underway within the World
Trade Organisation.
The cohesion of the Bretton Woods system arose from the commitment of the States
involved, a commitment that resulted in these States adopting a range of principles
that they had jointly elaborated. In contracting to the agreement, States were consent-
ing to limitations to their sovereignty. Basel II had a very different genesis. Its origins
lie in the desire on the part of banks to convince national regulators that Basel I, which
introduced capital adequacy ratios for each category of risk, could be improved by bet-
ter reflecting current industry practices. The current process is therefore in no way an
expression of a political will, rather it is the elaboration of norms and principles jointly
by regulators and regulatees. Whereas the Bretton Woods system was fundamentally

FINANCE & THE COMMON GOOD/BIEN COMMUN - SPRING 2005

 8
inter-governmental, the cornerstone of Basel II is agreement between transnational
banks and regulatory authorities. Basel II is thus the barely-concealed consecration
of the importance of the role taken by the world’s major banks on the stage of global
finance. Similar to Eurodollars in the 1960s, it is private banks that have irrevocably
taken the initiative in matters of financial practice and innovation. The fact that they
are now party to the negotiations indicates that they are as concerned as governments,
if not more so, by both the stability of the international system and the desire to re-
ceive equal treatment from regulators.
Basel II is emerging within the context of an extremely diverse environment in which
local financial institutions coexist alongside institutions capable of causing world mar-
kets to tremble. It is no surprise to find that competition lies at the heart of the new
system. The very largest banks, by emphasising their internal management abilities
and their experience in surveillance and oversight, are treated almost as partners un-
der Basel II, insofar as their internal methods will be validated on a case by case basis
by the authorities. According to recent research, this favourable treatment will allow
these banks to make major savings in terms of equity capital, savings it will not be
easy for smaller institutions to achieve. Such polarised treatment risks spreading to the
heart of many economies as banks will start to become more and more selective about
their choice of customers, based upon their own internal risk management capabili-
ties. Good risks will end up with those institutions provided with the best resources,
which will then offer them the most favourable conditions. Faced with this ability to
attract the best risks, smaller banks will find themselves having to deal with the me-
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dium and high risks.
In the end, the fundamental difference between Bretton Woods and Basel II is the
underlying political ambition. If reconstruction and development as the best guaran-
tors of peace were the explicit objectives of the Bretton Woods process, Basel II’s only
ambition is to preserve the status quo in terms of stability; if Bretton Woods was the
expression of the desire to reach a certain condition, Basel II concentrates on proce-
dure, leaving the actors to judge questions of substance. The Basel II system thus also
consecrates the retreat, impotence even, of politics when faced with the task of impos-
ing a place and a role on financial activities.

The Editors

FINANCE & THE COMMON GOOD/BIEN COMMUN - SPRING 2005