Rethinking the Basel Accords Through Social Constructivism

‘The structures of human association are determined primarily by shared ideas rather than material forces’ (Wendt, 1999, p.1). In 1988, the Basel Accords were introduced by the Basel Committee on Banking Supervision (BCBS) to ensure that financial institutions maintain adequate capital to withstand economic crises and fulfil their obligations (BIS, 2014). Over time, this framework has evolved into the foundation for global cooperation in banking supervision. While the Basel Accords are frequently perceived as technical financial regulations, constructivist theory in international relations provides an alternative interpretation; these norms are not dictated by economic necessity but are social constructs, shaped through interactions among central bankers, regulators, and policymakers who collectively share ideas regarding risk, legitimacy, and financial stability.

Constructivism in International Relations

Constructivist scholars such as Alexander Wendt (1999) and Smith (2012) challenged the prevailing paradigms of neorealism and neoliberalism. They proposed that international politics are primarily driven by material forces such as military capabilities or economic interests and that states act based on fixed, individual interests. At its core, constructivism is an ontological position (Smith, 2012). It asserts that many foundational elements of international relations, such as sovereignty and the meaning of power, are not naturally given but are socially constructed realities. Smith (2012) argues that constructivism helps refine theories and explores possible alternative worlds by focusing on how actors define themselves and their interests in relation to others. From this perspective, Basel norms can be studied objectively within the social world and exist and evolve through shared understanding.

The Basel Accords

The three phases of the Basel Accords—Basel I (1988), Basel II (1998), and Basel III (2010-2017)—represent the gradual development of global financial norms. Each phase reflects the institutionalisation of norms surrounding risk, responsibility, and financial stability. This signifies that, rather than critiquing the structural and containment features of institutions, it emphasises the social and cognitive aspects (Finnemore, 1996).

Basel I established minimum capital requirements for internationally active banks, introducing an ‘8%’ risk-weighted-assets ratio (RWA) (BIS, 2014, p. 1). This created the first agreed-upon standard for bank capital by removing the overall source of ‘competitive inequality arising from differences in national capital requirements’ (BIS, 2014, p. 1). From a constructivist perspective, this highlighted that capital adequacy is not merely a national policy issue, but essential for global regulation.

Furthermore, Basel II adopted a more risk-sensitive approach by introducing three pillars centred on minimum capital requirements, supervisory review processes, and market discipline (BIS, 2014). This demonstrated the growing internationalisation of complex risk management practices by banks. Consequently, the framework was significantly shaped by market-based norms and the principles of self-regulation, which also fostered the adoption of advanced internal risk-assessment models within financial institutions.

Developed in response to the 2008 global financial crisis, the final phase, Basel III (2010) sought to align regulatory capital requirements more accurately with the actual risks faced by financial institutions, while also responding to recent developments in financial innovation (BIS, 2014). As a result, it addressed issues such as disclosure frameworks and introduced a cap on how much banks can reduce capital using internal models (BIS, 2014). This phase stands for a normative shift toward system resilience, recognising global financial systems as interconnected and vulnerable.

Consequently, as the Basel framework evolved, central banks and regulatory bodies began to see themselves not just as national financial managers but as bastions of global financial stability (Ahmed, 2016). Regulatory authorities may also internalise the belief that capital adequacy and risk-based supervision are good governance practices (Ahmed, 2016). Therefore, constructivism highlights how norms shape institutional identities and that norms like the Basel Accords are not fixed. Still, they evolve through dialogue and prompt a revaluation of negotiated changes rather than automatic compliance.

Constructivism may also argue that banks often adopt the Basel Accords to signal alignment with international standards and enhance their legitimacy within the international financial community (Ahmed, 2016). The norms are not merely scientific rules imposed by objective economic necessity. Instead, they are the product of social interaction among central bankers, regulators, and policymakers, who share certain assumptions about financial stability, risk, and what constitutes legitimate banking behaviour (Ahmed, 2016). For instance, the concept that an 8% capital adequacy is not a natural law, but a norm that developed through consensus within the Basel Committee.

Moreover, the adoption of Basel standards could be driven by social pressures, particularly reputational concerns and the desire for international legitimacy. This is the case for many developing countries that wish to demonstrate modernity, reliability, and alignment with ‘best practices’, thereby increasing attractiveness to foreign investors. However, Ahmed (2016) criticises this constructivist perspective for being overly complex and making it difficult for many banks, especially those in the global south, to comply effectively. These norms may conflict with domestic practices and overlook power asymmetries by dominant Western/centric economies (Finnemore, 1996). Therefore, the Basel Accords lack a unified basis that accounts for cultural realities and may be better addressed by more adaptive regulatory frameworks.

Additionally, it can be argued that some level of material force is necessary to drive development and reduce systemic risk. If economics relies too heavily on the idea that knowledge is socially constructed, it becomes difficult to prove objective truths or universal principles (Niiniluoto, 1991). For example, while interpretations of financial risk are socially constructed, the material constraints imposed on banks in the aftermath of the 2008 financial crisis helped reinforce conflicting normative principles (Niiniluoto, 1991). Overall, the Basel accords highlight how global norms appear and evolve through international relations. From a constructivist perspective, they are not static rules, but social creations formed and reformed through shared meanings, institutional identities, and global pressures.

References

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Finnemore, M. (1996). Norms, culture, and world politics: insights from sociology’s institutionalism. International Organization, [online] 50(2), pp.325–347. doi: https://doi.org/10.1017/s0020818300028587.

Hohl, S., Maria Cynthia Sison, Stastny, T. and Raihan Zamil (2018). The Basel framework in 100 jurisdictions: implementation status and proportionality practices. [online] Bis.org. Available at: https://www.bis.org/fsi/publ/insights11.htm

Mohammed Ahmed, J. (2016). A conceptual framework for the Basel accords-based regulation. Journal of Financial Regulation and Compliance, 24(1), pp.90–103. doi:https://doi.org/10.1108/jfrc-02-2015-0007.

Niiniluoto, I. (1991). Realism, relativism, and constructivism. Synthese, 89(1), pp.135–162. doi: https://doi.org/10.1007/bf00413803.

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Wendt, A. (1999). Social Theory of International Politics. Cambridge: Cambridge University Press.