The Future of Global Banking Regulation: Navigating the Challenges Ahead
The Need for Preparation in a Complex Geopolitical Landscape
In recent times, global banking regulators have emphasized the importance of preparing for heightened geopolitical risks. Despite these warnings, a significant irony persists: the regulatory framework governing banks grapples with its own geopolitical challenges, potentially overshadowing those faced by the financial institutions themselves.
Basel III: A Regulatory Framework in Uncertain Times
The Basel III framework, finalized in 2017 as a culmination of post-crisis reforms, was originally slated for implementation in 2022. However, the landscape today reveals delays, with the European Union postponing critical components to 2026, the United Kingdom extending timelines to 2027, and the United States lacking a complete proposal. The recent appointment of Michelle Bowman, a former critic of Basel III, as the Federal Reserve’s vice-chair for supervision raises further doubts about the global adoption of these standards. Additionally, Treasury Secretary Scott Bessent’s remarks indicate a growing skepticism toward these regulatory frameworks.
Challenges in Global Cooperation
Uncertainty surrounding international regulatory cooperation is becoming increasingly apparent. The Financial Stability Board, previously proactive regarding climate and cyber risks, is now focusing on introspection, with a 2025 review of its processes as the primary goal. Meanwhile, the Basel Committee on Bank Supervision is responding to recent banking crises—not by introducing new regulations—but rather by exploring tools for effective supervisory judgment.
The Need for a Renewed Focus
It may be time for regulators to acknowledge that sustainable global standard-setting is contingent upon strong leadership from the United States. Currently, regulatory standards for banks are viewed as convoluted and outdated, and amid the prevailing conditions, a review seems unlikely. The limited recent assessment of market risk regulation highlights its unpopularity, further questioning the efficacy of the Basel system.
A Unique Regulatory Landscape
Banking regulation stands out in the global governance structure. Unlike other industries, including other financial sectors such as insurance and securities, banks do not follow a unified set of regulatory standards. The coexistence of U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) in the accounting field questions why banking remains an outlier.
A Historical Perspective on Banking Standards
The Basel Committee, established within the Bank for International Settlements—an institution founded after World War I to oversee reparations—has maintained a unique place in global finance. With a disproportionate representation, the committee comprises four U.S. seats and twelve for EU member states, alongside seats from the UK and Switzerland. Decisions are made via consensus, often leading to protracted discussions. The committee has thrived for over five decades due to the strong relationships among central bankers, but this could be changing.
Reflecting on the Purpose of Banking Standards
Initially, the Basel Committee published the “Concordat” in 1975, aiming to facilitate cooperation between home and host countries concerning international bank branches. It was not until 1988 that the first “Capital Accord”—defining capital requirements—was established, propelled by the need to prevent crises from transcending borders. The aspiration for an equitable global playing field emerged later, as the Basel framework grew in response to successful implementations.
The Path Forward: Local Regulation in a Changing Environment
As the era of seamless international finance appears to wane, banking regulations may need to refocus on local standards. This shift could paradoxically result in an increased regulatory burden, as banks will be required to adhere to distinct local regulations across various jurisdictions where they operate.
