Whether it be the challenges posed by the Covid-19 pandemic or some of the latest trends in finance, it remains clear that these developments are global in nature and require international solutions. By Justin Pugsley.

When the Basel Committee on Banking Supervision was wrapping up reforms to the Basel framework some years ago, it was expected that it would quietly step back from the limelight to focus on tweaking Basel III as circumstances dictated. 

However, early last year, the Committee found itself assisting authorities in tackling the fallout on bank balance sheets as Covid-19 rampaged across the world. It temporarily relaxed some of its prudential standards and timelines, allowing banks to release capital to support the economy and to move most of their workforces to home working. 

Overall, the framework, though not fully implemented, saw bank balance sheets well padded out for the Covid shock. 

Other global standard setters (GSSs), such as the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO) also played key roles in coordinating the international financial regulatory Covid response.

New variants permitting, the world is hopefully moving on from the pandemic. However, this does not mean any respite for the GSSs, with their leadership greatly needed in the years ahead. 

At least three major trends will call on their continued engagement. Climate change is a global phenomenon that absolutely demands an international response. Financial firms are pursuing green initiatives, which requires global standards to be truly effective. Realistically, this is best achieved via the GSSs, whether this is IOSCO providing guidance on green standards for capital markets, the Basel Committee on the prudential treatment or the FSB providing a roadmap to tackle climate-related financial risks. 

The explosive rise of cryptocurrencies, which bypass international borders and is partly a rebellion against centralised finance and fiat currencies, also demands the attention of the GSSs. If left unchecked, this could potentially foster widespread crime and market abuse, and even spawn an entire new shadow banking system that could pose financial stability risks. The Basel Committee is already floating ideas on the prudential treatment of bank exposures to crypto-assets. 

Digital currencies

Meanwhile, The Bank for International Settlements (BIS) is coordinating efforts to design central bank digital currencies (CBDCs) in response to fiat-currency-backed stablecoins and cryptocurrencies. The BIS is playing an important role in CBDC designs and how those digital currencies will operate across borders. 

Crypto could be a big win for society through cheaper and more innovative financial services; it could even drive financial inclusion, providing it is properly regulated so users can trust it. The GSSs can help crypto go mainstream globally. 

Big tech is also a growing concern for the likes of the BIS, which frets over issues such as concentration risk, as these behemoths sweep away all in front of them in their quest for new markets.  

Without a doubt, these companies face increasing regulation the deeper they dive into financial services, which will at least level the playing field for the established banks.  

However, to date, when it comes to tackling these three major challenges, national regulators are not hanging around. Among the big jurisdictions, the EU has taken a lead on regulating climate-related risks and crypto, with the US catching up. China leads in terms of tackling its own big-techs — though its sometimes draconian approach might be too much for liberal societies to follow.   

The solutions to these three global challenges for the financial system are largely being taken at a national level at the moment. Given the pace of these developments, this is understandable. However, if those regulatory solutions are to be as effective as possible, involvement of the GSSs is absolutely needed. They can provide a set of internationally recognised standards that national supervisors can follow while also fostering cross-border finance, which in turn supports the global economy. They can also help supervisors stay on top of emerging risks and share best practice across the world.