Rather than imposing intrusive inspections and external audits, Basel II placed heavy emphasis on self-regulation, disclosure and transparency. “Well-informed” market judgments would do the work of oversight better than “arbitrary” regulatory decisions. After all, rational investors could have no interest in exposing themselves to the risk of catastrophic loss, or so the reasoning went. They would price bank shares accordingly, sending a clear signal as to which banks were safe and which were not. The regulators were utterly subservient to the logic of the businesses they were supposed to be
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