The financial crisis of 2007-8 has led many to the conclusion that financial regulation was inadequate, especially but not only in the United States. It may therefore come as a surprise to many (although not to bankers) that regulators from many countries have been working intensely for the past decade on appropriate regulations -- in particular, capital requirements -- for leading banks around the world. Tarullo here reviews in detail the controversies and compromises that led to agreement on Basel II (named after the Swiss city where most of the discussions and negotiations took place). Differing concepts of what bank regulation should entail, differing judgments about risk, and differing national interests had to be bridged to reach agreement on the rules, which for the largest banks leave risk assessment to each bank itself, albeit subject to enhanced supervision. Alas, recent events raise serious questions about these banks' ability to assess risk -- at least for possible events outside their experience. Tarullo provides a detailed account and evaluation of both the process and the final product, and it is sobering reading for anyone interested in the international coordination of financial regulations.
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