Basel head urges capital rule finalization ‘as soon as possible’

The new chief of the Basel Committee on Banking Supervision is urging the world’s top economies to “lock in” the latest version of the group’s international standards “as soon as possible.”

In a speech delivered Wednesday afternoon in Washington, D.C., Erik Thedéen, chair of the committee and governor of Sweden’s Sveriges Riksbank, defended the merits of global cooperation and warned countries not to “succumb to short-term or specific interests.”

“The work to fix the banking system fault lines exposed by the [global financial crisis] is not done,” Thedéen said. “We need to lock in the financial stability benefits of implementing the outstanding Basel III standards in full and consistently, and as soon as possible.”

Thedéen delivered his remarks at the Institute of International Finance, held as banking and finance officials from around the world gather in Washington, D.C., for the annual meetings of the International Monetary Fund and the World Bank Group. The speech also comes at a time when the future of the Basel committee’s latest set of rules is in doubt.

Known as the Basel III endgame in the U.S., these standards — agreed upon by the committee in 2017 — establish minimum thresholds for risk-weighted capital requirements. They dictate how much Tier 1 equity banks must maintain to offset their credit, market and operational risks. 

The U.S. implementation of the rules has ground to a halt in light of staunch opposition by the banking industry to the proposed framework set out by the Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency last year. The agencies have since agreed upon a revised set of changes, but are at an impasse over whether to finalize those standards as is or reopen the notice and comment rulemaking process.

As the U.S. process stagnates, other prominent jurisdictions have put the brakes on their own implementations. The Bank of England and the European Central Bank have both paused their processes while they await a resolution in the U.S. This delay has led officials from Europe’s top economies to second-guess the European Union’s commitments. Last month, finance ministers from Germany, France and Italy urged the continent’s governing body to consider revisions that would help the “competitiveness” of their domestic banks.

Thedéen warned against this type of policymaking, arguing that attempting to “unlock” economic gains by watering down regulatory oversight is shortsighted.

“As with other areas of economic policymaking, any perceived short-term gains are usually more than offset by longer-term pain,” he said. “Shaving off a few basis points of capital will not unlock a wave of new lending, but it will weaken your resilience.”

Thedéen took the helm at the Basel Committee in June, replacing outgoing Chair Pablo Hernández de Cos, the former governor of the Bank of Spain who had held the position since 2019. Wednesday’s remarks were Thedéen’s first as chair. 

During the speech, he said that the Basel III standards were the “cornerstone” of the international regulatory world’s response to the global financial crisis of 2008. He added that, despite the recent headwinds, the Governors and Heads of Supervision — the committee’s oversight body — have unanimously reaffirmed their commitments to implementing the framework. 

The Basel Committee’s agreed upon policies are nonbinding and come with the expectation that member organizations will have to make some adjustments to the standards to fit within their own legal and regulatory frameworks. Still, Thedéen said, the accords establish a floor for bank oversight, which he said is crucial to dealing with emerging threats in an increasingly interconnected financial world.

“A global compromise — however imperfect it may appear to some — is preferable to a free-for-all framework,” he said. “Internationally active banks then have a common minimum regulatory baseline which they can manage their business around. Supervisors are able to better assess the relative resilience of their banks across jurisdictions. The scope for regulatory arbitrage is reduced. Level playing fields are enhanced.”