The Basel Concordat II of 2024 laid the foundation for more collaborative and meaningful supervisory colleges; strengthened the functioning of the crisis management groups; and set out more clearly the responsibilities of home and host supervisors. Second, supervision extended beyond checking on financial institutions’ risk management and internal controls to better understanding the risk culture of these organisations. Processes, controls, and limits can only go so far in restraining excessive risk-taking. Ultimately, it is people that take risks. And the incentive structure, governance practices, and value systems in financial institutions are what determine their attitude towards risk. Regulators came together to establish common frameworks for what we now call culture and conduct supervision. This included sharing information on errant industry professionals to deter the problem of “rolling bad apples”. Supervisors began to use data analytics, sentiment assessments, and the tools of behavioural psychology to gain insights on the culture and conduct in financial institutions. These insights served as inputs to supervisory assessments of the risk culture in financial institutions and, where necessary, pre-emptive interventions. Third, the active integration of technology into the supervisory process – what we now call SupTech – began to dramatically enhance supervisory effectiveness by the mid-2020s. Data analytics finally solved the long-standing challenge that banks had in aggregating credit and market exposures across various businesses and geographies. This enabled banks to derive a consolidated risk profile in real-time.
In banking, capital buffers were increased, liquidity requirements were introduced, and caps placed on leverage under a new Basel III accord. In the derivatives markets, requirements were put in place for trade reporting, central clearing, and margining. To tackle the too-big-to-fail problem, global systemically important financial institutions, or GSIFIs, were identified and subjected to higher loss absorbency requirements, more intensive supervision, and resolution planning. Implementation of the reforms – especially Basel III – progressed well, driven by a broad-based consensus on preventing a repeat of the Global Financial Crisis. The generous timelines for implementation allowed industry to adjust to the new regulatory landscape. It was only last year, in 2027, that we achieved full implementation of the final component of the Basel III reform package – the output floor. Regulatory evaluation and adjustment (2017 to 2020) During the second phase, from 2017 to 2020, the focus turned to evaluating the effects of the regulatory reforms. There was growing feedback that some reforms had unintended consequences, some reforms were at odds with others, and that the cumulative impact of the reforms had dampened economic growth. A series of reviews was undertaken during this period to assess both the effectiveness and effects of various reforms. The reviews largely affirmed that the benefits of the reforms, in terms of reducing the risk of financial crisis and its consequent economic impact, far outweighed the costs. In fact, controlling for other factors, there was little evidence that the reforms resulted in any general deterioration in the availability or pricing of credit.