Kim Pernell’s objective is to trace the long-term development of bank regulation in three countries – the United States, Canada and Spain -  and to show how the different ‘principles of order’ embedded in each country’s institutions and ideological preconceptions have persisted through time and showed up in different regulatory behaviour patterns during the financial crisis of 2007 – 2009.

The main principle of order that Pernell identifies in the United States is competition, which is thought to be the mainspring of safety and prosperity. In Canada, it is public rights: safety and prosperity are regarded as deriving from different sources, and a balance needs to be maintained. In Spain the main principle is state sovereignty: centralised oversight is a precondition of both safety and prosperity.

The different regulatory behaviour patterns of 2007 – 2009 that Pernell examines relate to only two issues – firstly the regulatory treatment of ‘conduits’: companies set up by banks to hold assets transferred from the banks’ own balance sheet, and financed by asset-backed commercial paper (ABCP) issued to investors; and secondly, the accounting treatment of banks’ provisions against credit losses. On both of them the Spanish regulator – the Banco de Espana – scored higher, on Pernell’s assessment, than both their American and Canadian counterparts. The Banco de Espana was unwilling to allow banks relief from capital requirements on assets transferred back onto banks’ balance sheets from ABCP conduits when the financing of the conduits became difficult; and it allowed banks to make higher loan loss provisions than was permitted by international accounting standards. On both counts it was more prudent than the Americans and Canadians.

Pernell’s assessment is reasonable, but these two issues, important though they both are, are not the totality of bank regulation. The Spanish regulators got these two things right, but they got the savings banks catastrophically wrong. Spanish savings banks were able to finance a massive and unsustainable real estate boom, which was at the heart of the Spanish financial crisis. After the crisis, Spanish banks collectively needed 56 billion euros of new capital, i.e. 5 1/2% of Spain’s GDP in 2012, of which 39 billion was in the form of state aid. Spain suffered very much greater macroeconomic damage during the financial crisis than either of the other two countries: between 2008 and 2012, its GDP fell by 7%, whereas the USA’s increased by 4% and Canada’s by 5%. Astonishingly, Pernell doesn’t mention the Spanish savings banks or the real estate boom at all.

Pernell devotes quite a bit of attention to the Basel Committee on Banking Supervision, which was set up in 1974, and its minimum capital ratios, which date from 1988. She ascribes the introduction of the minimum ratios to the ascendancy of neo-liberal economic thought, the doctrine of unregulated competition and government noninterference, and to the dominant positions of economists with PhDs in regulatory agencies.

This is simply not credible. For one thing, one of the main objectives of the 1988 Basel ratios was not to facilitate competition, but to restrict it by constraining the activities of Japanese banks which were lending on a large scale in international credit markets despite very low ratios of capital to assets. And for another, throughout their existence, the Basel ratios have been constructed so as to understate the risks of lending to sovereign governments. Thus loans to OECD-area governments are assigned a zero credit risk weight; and in the field of liquidity regulation, government securities of any maturity, however long, are counted as ‘high quality liquid assets’, even if the market for them is in fact illiquid, whereas hardly any privately-issued assets are  thus regarded. Far from being a bastion of free markets, the Committee is a sophisticated device for asserting state power in banking. Anyone interested in the history of the Basel Committee is recommended to read Charles Goodhart’s ‘The Basel Committee on Banking Supervision: a history of the early years 1974 – 1997’ (Cambridge University Press, 2011).

It might have been expected that the Basel Committee and its work would have caused national banking regulation practices to converge, but its recommended minimum standards apply only to internationally-active banks, though their logic applies equally to other banks. Many divergences remain. The recent history of the United States provides an egregious example: Silicon Valley Bank was able to value its holdings of U.S. government securities in its accounts at amortised cost, ignoring the fall in their market price that had occurred since the bank had bought them. It appeared to have adequate capital but nearly all of the capital had been destroyed by the fall in bond prices. No bank subject to Basel would have been able to do that.

Pernell certainly has a point: there are deeply-rooted national ‘principles of order’ that influence bank regulation. However, they are evidently not the only things that matter. She finds evidence to support the theory but ignores other evidence which shows that the picture is more complicated than she suggests. Nevertheless, her historical accounts of the development of bank regulation in the three countries which she examines are interesting and illuminating.