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The writer is the managing director of Frontline Analysts and the author of Unexplainable Machines.
Banking supervisors around the world have accused the need to prepare for an increase in geopolitical risks through speeches and letters from “Dear CEO.” While this may be mere ironic or subconscious predictions, financial regulations have their own geopolitical issues. It’s probably more serious than what the banks themselves face.
Consider the so-called Basel III Endgame. Consider this is the last stage of post-crisis regulatory reform for banks. This was agreed in 2017 and was originally intended to be implemented from the beginning of 2022. The current state of play is that the EU has delayed key points in 2026, the UK has delayed the whole thing until 2027, and the US has not even a full proposal. With past Endgame critic Michelle Bowman being appointed as the post of Vice-Chair of the Federal Reserve for oversight and Treasury Secretary Scott Bescent’s latest speech appears to reject the entire Basel standard principles, there must be doubts as to whether the full agreement will be implemented worldwide. No matter what happens next in American politics, bank lobbyists are extremely efficient. Endgame was already late dilution under the Biden administration.
Uncertainty about global cooperation is beginning to widen. It is notable that the Financial Stability Committee, which once gave way to climate risk, cyber risk and shadow banking, will be working on its own process review as a key deliverable in 2025. The Basel Committee on Bank Supervision itself will respond to the collapse of Silicon Valley Bank and Credit Swiss this year in 2023 by developing a “tool” and perhaps a “effective supervisory judgment” principle rather than new regulations.
There may be a time when regulators face the possibility that the global standard setting process will not work without leadership from the US, or at least without cooperation. International banks’ regulatory standards are tedious, complicated and awful, requiring reviews. But in the current climate, they don’t get it. In fact, it appears that the only reviews carried out regarding market risk regulation were the least popular bits in Endgame. What if the Basel system stops working?
Banking regulations are a bit out of the global governance system. Apart from marine law, other industries (even other finance sectors such as insurance and securities do not have a single set of regulatory standards. Accounting professionals get along well with the coexistence of US GAAP and IFRS standards. Why are banks so special?
The Basel Committee is odd. It is based in an international settlement bank established after World War I to oversee reparations from Germany, and is useful enough to not be closed for the next century. The US has four seats, the EU is comically overrepresented, with 12 seats in the member states and the European Central Bank. There are two seats in the UK and Switzerland. The committee acts by consensus rather than by majority vote. In other words, the argument can be taken forever. The group has only been obsessed with each other for the past 50 years, as it is a very closely woven network of central bankers who share a common understanding of the world.
Therefore, it is worth looking back at history to see what you want to get from global banking standards. The first document that the Basel Committee ever released was “Concordat.” This was the first statement in 1975, “Concordato,” which outlined the principles of cooperation between the home and host jurisdiction of the bank’s international office. Thirteen years later, everyone felt the need for the first “capital agreement” and established the definition and love of the capital of the banks as we know today.
However, the purpose at the time was to prevent problems in one market, such as the Latin American debt crisis and the Japanese real estate bubble, from spreading around the world. The dream of a completely level global arena came later. The Basel system has grown because success is what makes it successful.
The central bankers, unlike almost every other bureaucrat, had such a good relationship that they felt they could continue to act as a unified source of governance. When the age of frictionless international finance is over, banking regulations may need to return to their local focus. Paradoxically, that probably means more regulatory burden.
