Source: Bank for International Settlements
I would like to start by thanking the organisers for the invitation to speak at this important symposium.
A resilient banking system and financial stability more broadly are largely driven by:
- Bank risk management and governance practices;
- The quantity and quality of capital and liquidity buffers;
- The effectiveness of bank supervision; and
- The effectiveness of market discipline.
Given time constraints, my brief statement will focus on the role of global capital and liquidity standards. That is not to underplay the critical importance of the other factors. In this regard, the Basel Committee has an ongoing work programme focused on strengthening supervisory effectiveness.1 It also remains the case that the most important source of banks’ financial and operational strength comes from their own risk management and governance arrangement.2 And the Committee will continue to strengthen Pillar 3 disclosures and promote market discipline to help stakeholders adequately assess banks’ risk profiles.
Minimum international standards
According to the BIS International Banking Statistics, banks’ foreign claims and other exposures totalled USD 45 trillion at the end of the second quarter of 2024.3 Given the significant global nature of banking, there is a need to have a global minimum level-playing field.
To promote such a global level playing field, the Basel Committee sets minimum standards for internationally active banks. Consistent with this approach, many jurisdictions choose to apply more stringent requirements than the minimum Basel standards. In addition, most jurisdictions apply some level of proportionality – that is simpler rules are applied to non-internationally active banks.4
Globally consistent minimum regulatory standards seek to limit regulatory fragmentation, regulatory arbitrage and a “race to the bottom” which dilutes the resilience of banks. While weaker standards can promote growth in the short-run, they typically lead to excessive risk taking, and the build-up of excessive leverage, which ultimately reverses and results in a sharp contraction in credit, bank failures, broader financial instability and large losses in economic output. In short – a race to the bottom is in no one’s long-term interest – in particular banks.5
Minimum standards for capital and liquidity regulation play a critical role in ensuring the soundness of individual banks and overall financial stability. Rigorous regulatory standards also help to promote economic growth by ensuring lending is sustainable and can be maintained when shocks hit the system, or when individual banks incur losses.6
Given the importance of globally consistent minimum standards, implementation of the Basel III regulatory framework remains the key priority for the Basel Committee. While there have been some delays in implementation, most of the outstanding Basel III standards are now in force in around 70% of BCBS member jurisdictions.7
Calibration of international standards
It is important to note that international capital and liquidity standards are not calibrated to produce zero bank failures. Despite the significant strengthening of bank capital and liquidity ratios since the Great Financial Crisis, banks remain highly leveraged firms. Capital and liquidity buffers can absorb most, but certainly not all shocks that a bank may face. And history has shown that the frequency and severity of such shocks have been far greater than what would be expected based on banks’ internal models.8 All this points to the importance of bank risk management and governance, effective supervisory oversight, and implementation of Basel III which significantly reduces model risk.
On the issue on calibration of regulatory standards it is important to also keep in mind that claims of negative effects of higher capital and liquidity regulation on bank lending and economic growth have not materialised. Rather, since the GFC we have seen that more highly capitalised banks are not only more resilient, they are also more profitable and lend more through the cycle.9
The “Swiss Finish”
I would like to conclude by making a general point about the so-called “Swiss Finish”. Having lived in Switzerland for nearly twenty years, I have come to understand this as, among other things, an approach that favours quality over quantity.
I think the same principle should apply to how we think about regulatory rules. If given a choice I would favour quality over quantity. In my view it is better to favour high quality capital over lower quality capital (even if that means lower reported capital ratios). Additionally, I have a general preference for simplicity over complexity, and being transparent.
These three principles shape my personal views on the policy issues we will discuss during the panel. So whether we are thinking about the treatment of capital within a banking group, the role of Additional Tier 1 regulatory instruments or other policy issues, I am generally going to favour:
- quality over quantity;
- simplicity over complexity; and where possible
- being transparent.
Thank you. I will stop there and look forward to the discussion.
References
Basel Committee on Banking Supervision (2021): “Proportionality in bank regulation and supervision”, July.
— (2022a): “Evaluation of the impact and efficacy of the Basel III reforms”, December.
— (2022b): “Evaluation of the impact and efficacy of the Basel III reforms – Annex”, December.
— (2023): “Report on the 2023 banking turmoil”, October.
— (2024): “Basel Committee reports member jurisdictions making progress in implementing Basel III”, press release, 2 October.
Bank for International Statistics (2025): “Locational banking statistics”, see Table B4: here Consolidated banking statistics publication table: BIS,CBS_B4,1.0.
Behn, M, R Hasselmann and V Vig (2022): “The limits of model-based regulation”, Journal of Finance, vol 77(3), June.
Caparusso, J, U Lewrick and N Tarashev (2023): “Profitability, valuation and resilience of global banks – a tight link” Bank for International Settlements Working Paper No 1144.
Thedéen, E (2024): “Charting the course: prudential regulation and supervision for smooth sailing”.
1 BCBS (2023).
