We have already achieved more or less the right level of capitalisation for the banking industry through the initial set of Basel III reforms after the financial crisis. If we now precipitate a further increase in the level of capital requirements in the process of adjusting the framework and fine-tuning the calibrations, it would unduly constrain credit intermediation and consequently economic growth. We must guard against these unintended outcomes. It is therefore heartening that the Basel Committee has committed not to significantly increase overall capital requirements for banks. Distribution of Credit Matters as Much as Allocation of Credit Even as we hold the line on aggregate capital levels, we need to be sensitive to the effect of capital requirements on specific business lines and on different economies. •  This brings me to the second area that we should be watchful of: namely the distribution of bank credit across the economy as a consequence of regulation. The Basel Committee will be finalising this year its review of credit risk capital requirements, as it seeks to address excessive variability in risk-weighted assets. •  The revisions to the capital standards for credit risk that are currently being proposed will require bank exposures to be risk weighted under a Revised Standardised Approach instead of the Internal Ratings Based approaches. •  The return to a Standardised Approach is motivated in part by limitations in risk modelling, as the last crisis laid bare.
•  While SME loans tend to be riskier on a standalone basis, as a portfolio the risks are more diversified than loans to larger corporates. •  The Basel Committee recognises this and the current capital framework provides for preferential capital treatment for exposures to SMEs for banks using internal models. •  And the Basel Committee has further proposed applying a lower risk weight for banks’ SME exposures compared to unrated corporate exposures under the revised Standardised Approach. This will help alleviate the cost of SME financing. Conclusion Let me summarise my main points. We have made good progress in bank regulation since the crisis. •  Implementation has been generally good but some areas need more work and some jurisdictions need to close the gaps. •  Overall, the reforms have helped to make banks safer and more resilient. As we finalise the Basel III capital reforms, we must ensure that banks are not only safe but also serve their purpose of supporting the economy. •  We should be mindful of the effects of low profitability on banks’ ability and willingness to lend. •  We should be mindful not to increase significantly the overall level of capital requirements on banks even as we finetune the detailed capital rules. •  And we should be mindful not to unduly penalise lending to important segments of our economies – like trade and SMEs – even as we address the limitations in banks’ internal models.