Factors of Convergence and Divergence in Microprudential Regulation: A Comparative Analysis

Micro prudential regulation is concerned with the structure of each financial intermediary and its ability, in essence, to operate in a healthy and sound fashion in the long run. In this respect, financial legislation worldwide developed as to set out the microprudential requirements against which to appraise such ability by financial supervisors. The Basel Committee for Banking Supervision played a pivotal role in shaping the regulatory debate at the international level, in the attempt to ensure convergence in the microprudential regulatory framework. From Basel I to Basel IV, giant leaps have been taken in order to increase the effectiveness of microprudential regulation, in the quest to equip credit institutions with adequate resources (in terms of capital, liquidity and corporate governance measures). Yet, while in the European Union the Basel standards have been widely accepted, some differences still exist in the way each jurisdiction decided to regulate, through hard-law, such requirements. Starting from the rationale behind microprudential regulation, this chapter will examine the main developments of the Basel accords and it will provide an overview of four selected jurisdictions (EU, UK, US and China) in order to show how and why they adopted different microprudential approaches, focusing on capital and liquidity requirements.