Stefan Ingves: Implementing the regulatory reform agenda – the pitfall of myopia Speech by Mr Stefan Ingves, Governor of the Sveriges Riksbank and Chairman of the Basel Committee on Banking Supervision, at the Federal Reserve Bank of Chicago Annual International Banking Conference, Chicago, 6 November 2014. *  *  *  The subject of this conference is indeed very timely – seven years after the outbreak of the financial crisis, there has been substantial progress in the post-crisis regulatory reform agenda, with a number of important milestones reached. Therefore, now is a good time to take a step back and ask how the different bits and pieces of the regulatory framework fit together. And, more specifically – have the vulnerabilities revealed in the crisis been adequately addressed? Are additional adjustments still necessary? Or, conversely, have we gone too far and created a regulatory Frankenstein’s monster that no-one has full control over and that stifles lending and economic growth? This latter view is one that I sometimes hear when meeting representatives of the banking industry. The feeling seems to be that we are overwhelming the financial system with a regulation tsunami with too many reforms being implemented too soon. This will lead to unacceptable consequences in the form of higher funding costs, reductions in market liquidity with market-makers pulling out of markets, collateral shortages; and many banking activities simply disappearing, or moving to the so called shadow banking sector.
This worked fine during the Great Moderation, but unfortunately with the collapse of Lehman Brothers another old truism suddenly came to life: “markets function the worst when you need them the most”. Against this background, it is quite embarrassing that so few could see the crisis coming. From a regulatory point of view, all the ingredients were there, or rather they were lacking. And this is the first point I want to make – the regulatory framework was unsatisfactory and becoming more so the more complex the financial system became. Then, turning to my second point, which is: The costs of financial crises are huge. This is true in general, but especially so for the recent one. For example, according to a recent study by  1  2  The figure SEK 17,000 =1,000,000*50%*3,4%, where 3,4% is the implied minimum core Tier 1 capital requirement under Basel I. The risk-weight for mortgages was 50% during this period. Under Basel II the implied minimum core Tier 1 capital requirement fell from 3,4% to 2% of risk-weighted assets, and was 2% in 2011–2012 when banks’ internal average risk weights for mortgages was 6%. SEK 1,200 SEK = 1,000,000*6%*2%. For more information see Sveriges Riksbank (2013) Financial Stability Report 2013:2, November, pp 21–24. BIS central bankers’ speeches  IMF economists, in a sample of countries representing just over 50% of world GDP, the total amount of government recapitalisation, asset purchases and guarantees during the period 2007–2011 amounted to nearly $ trillion.