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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is chair of the Basel Committee on Banking Supervision and governor of the Riksbank
In a world increasingly fragmenting along geopolitical lines, the true test of financial resilience lies not in national safeguards but in a willingness to build global trust through shared standards. We either strengthen together or weaken apart. That is why regulators and market participants in banking should push for convergence, not for arbitrage in the adoption of Basel III accords on bank regulation.
The Basel Committee on Banking Supervision was born out of crisis. In 1974, a bank failure exposed the frailties of a system that lacked a global structure for timely information sharing and co-operation on supervisory and regulatory matters. The result was confusion, contagion and lost confidence. Since then, the committee has sought to build a global regulatory level-playing field for internationally active banks. Together, we have developed common standards that reflect the diverse perspectives of our membership. These standards have evolved in response to the changing financial landscape.
Co-operation does not mean perfect harmonisation. A key strength of the Basel Framework is that it sets a common minimum global baseline for internationally active banks. Jurisdictions can go beyond this to reflect additional risk features of their banking systems. And members can also apply a proportionate approach for other banks.
Banking knows no borders. Risks migrate and financial contagion is indifferent to the boundaries on a map. The Great Financial Crisis was a painful reminder of these dynamics; it carved a deep and lasting scar on economic growth. The reforms that followed, Basel III, were possible only because jurisdictions recognised that co-operation was not an option but a necessity.
That commitment endures. About 70 per cent of members of the Basel committee have now implemented Basel III. And governors and heads of supervision at national central banks and supervisory authorities recently unanimously reaffirmed their expectation to implement the outstanding standards in full, consistently and as soon as possible.
We have seen the tangible benefits of the implemented Basel III standards already. Over the past decade, there have been frequent episodes of market dislocation. Unlike the GFC, the global banking system did not amplify these crises, and bank lending to households and corporates did not come to an abrupt halt. Banks were not part of the problem.
But the job is not done. There continue to be important regulatory faultlines that will remain unaddressed if the last parts of Basel III are not implemented in full and consistently. While there are opportunities to reduce regulatory complexity, this should not reduce banks’ resilience.
Implementing Basel III is not just a bureaucratic exercise. A level playing field is critical to preventing regulatory arbitrage, maintaining confidence in the international banking system and avoiding a dangerous deregulatory race to the bottom. When regulators diverge, financial stability drifts. Fragmentation would be disruptive, reduce prosperity in good times and weaken our ability to respond during stress events.
Looking ahead, there are many issues that no single country can navigate alone such as the ongoing digitalisation of finance, threats to banks’ operational resilience or the interconnections between banks and non-bank financial intermediation. Financial stability is a global public good.
The Basel committee is not a remote foreign authority pulling strings from afar. It is a forum for central banks and supervisory authorities to share information, exchange views and co-operate. It engages extensively with a wide range of stakeholders including academics, civil society, market participants and legislatures. We will continue to adapt where necessary and listen to diverse perspectives.
So to policymakers, I say this: hold the line and don’t abandon the common ground. To market participants: far too often, fragmentation stems from national lobbying seeking deviations from global standards. Global standards reduce cross-border frictions for your operations and support long-term investment and economic growth. This is in the business interest of all market participants.
To the public: the Basel committee’s work may seem arcane at times but its impact is direct. Strong global standards mean safer banks and a sounder banking system that can provide key services at all times. History will judge us not by whether we saw the risks but whether we acted together when it mattered to safeguard financial stability.
