Compliance with international regulatory regimes : the Basel Capital Adequacy Accord in Japan, South Korea, and Taiwan, 1988-2003
The IPE literature on compliance has presented three theoretically competing mechanisms to induce compliance with international regulatory regimes: externality- based, market, and domestic compliance mechanisms. However, most studies on compliance have limited their analytic focus to formal compliance with explicit provisions of regimes, neglecting the question as to whether formal compliance enhances regime effectiveness, which is the fundamental issue of compliance. Yet, although national authorities implement an international regulatory regime, they frequently manipulate the implementation to help regulatory targets formally comply with its explicit provisions but still allow them, in practice, to defect from its objectives. This study introduces the concepts of cosmetic compliance and comprehensive compliance, and it analyses the effectiveness of the three compliance mechanisms in ensuring comprehensive compliance by addressing compliance with a momentous international financial regulatory regime, the 1988 Basel Capital Adequacy Accord, in three important Asian countries, Japan, South Korea, and Taiwan, from 1988 to 2003. All three countries were formally in compliance with the regime throughout most of the period. However, Japan's compliance was consistently cosmetic, while Korea and Taiwan also complied cosmetically during much of the period. A high degree of comprehensive compliance occurred only in Taiwan during the early 1990s and in Korea during the late 1990s and early 2000s. All three compliance mechanisms contributed to formal compliance. However, the externality-based compliance mechanism and the market compliance mechanism were not effective in ensuring comprehensive compliance. The operation of the domestic compliance mechanism was necessary for comprehensive compliance; yet, its effectiveness relied on the capacity of national authorities to implement it. As a result, the actual outcome of the operation of the domestic compliance mechanism was affected by domestic factors, in particular, the capacity to deal with formal compliance failures by regulatory targets, the domestic distributional effects of compliance, and the independence of the regulatory authority.