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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is a managing director at Frontline Analysts and the author of The Unaccountability Machine
The bank supervisors of the world are, through speeches and “Dear CEO” letters, warning their charges of the need to prepare for elevated geopolitical risk. This might be mere irony or subconscious projection, but financial regulation has its own geopolitical issues — arguably more serious than anything faced by the banks themselves.
Consider the so-called Basel III endgame, the last stage of the post-crisis regulatory reforms for banks. This was agreed in 2017 and initially meant to be implemented from the start of 2022. The current state of play is that the EU has delayed some of the key points to 2026, the UK has delayed the whole thing to 2027 and the US does not even have a full proposal. With the appointment of Michelle Bowman, a past critic of the endgame, to the post of Federal Reserve vice-chair for supervision, and Treasury secretary Scott Bessent’s most recent speech seemingly rejecting the whole principle of Basel standards, there have to be doubts as to whether the full Accord will ever be globally implemented. Whatever happens next in American politics, the bank lobbyists are very efficient — the endgame was already delayed and diluted under the Biden administration.
Uncertainty about global co-operation is beginning to spread. It is noticeable that the Financial Stability Board, which once led the way on climate risk, cyber risk and shadow banking, is going to spend 2025 working on a review of its own processes as its major deliverable. The Basel Committee on Bank Supervision itself will be responding this year to the collapses of Silicon Valley Bank and Credit Suisse in 2023 by developing “tools” and perhaps some principles for “effective supervisory judgment”, rather than any new regulations.
It might be time for regulators to face up to the possibility that without leadership — or at least co-operation — from the US, global standard-setting processes do not work. The regulatory standards for international banks are cumbersome, complicated and badly in need of a review. But in the current climate, they are not going to get one. In fact, the only such review that has been carried out, on the regulation of market risk, seems to have been the least popular bit of the endgame. If the Basel system no longer works, what then?
Banking regulation has been a bit of an anomaly in the system of global governance. Apart from the law of the sea, no other industry — not even other sectors of finance such as insurance or securities — has a single set of regulatory standards. The accounting profession gets along with the coexistence of US GAAP and IFRS standards. Why are banks so special?
The Basel committee is an oddity. It’s based in the Bank for International Settlements, which was set up after the first world war to supervise reparations from Germany and has spent the following century making itself useful enough to never be closed down. The US has four seats and the EU is comically over-represented with 12 seats for member states plus the European Central Bank. The UK and Switzerland have two seats each. The committee acts by consensus rather than majority vote, meaning discussions can take forever. The group has only held together for the last five decades because it’s a very tightly knit network of central bankers who share a common understanding of the world.
It’s therefore worth looking back into history to see what we hoped to gain from global banking standards. The first document that the Basel committee ever published was the “Concordat”, an initial statement outlining the principle of co-operation between home and host jurisdictions for international offices of banks in 1975. It wasn’t until 13 years later that anyone felt the need for the first “Capital Accord”, setting out the definitions of bank capital and the ratios that we know and love today.
But the purpose at the time was to ensure that problems in one market — such as the Latin American debt crisis or the Japanese real estate bubble — didn’t spread across the globe. The dream of a perfectly level global playing field came later. The Basel system has grown because success breeds success.
The central bankers, unlike almost all other bureaucrats, had such good relationships that they felt able to keep acting as a unified source of governance. If that era of frictionless international finance has come to an end, then banking regulation might need to go back to local focus. Paradoxically, that will probably mean more regulatory burden, not less, as everyone will have to satisfy local standards everywhere they operate.
