Ingves: Basel III – much-needed regulations for a safer banking sector

On Tuesday 1 February, the Governor of the Riksbank, Stefan Ingves, made a speech at Sveriges Finansanalytikers Förening (the Swedish Society of Financial Analysts) in which he presented his view of the new regulations for banks, Basel III, and discussed the effects that we can expect these regulations to have in Sweden.

He began by noting that the financial crisis revealed fundamental shortcomings in the current regulations for banks (Basel II) and that these must be dealt with. Above all, it has become apparent that the banks have been allowed to hold too little capital, and of too low quality, and that the regulations have underestimated a number of risks in the operations of the banks.

Mr Ingves described the aims of Basel III – to set up global minimum regulations that strengthen the ability of the banks to manage losses and that reduce the likelihood of new financial crises. The regulations will require the banks to hold more and better-quality capital. He pointed out that Basel III does not only relate to capital but has many important components, including completely new requirements concerning the banks’ liquidity management and limits for the banks’ debt levels.

Mr Ingves welcomed the new regulations and said that it is important that the banks strengthen their buffers so that we can avoid new crises. However, given developments in the Swedish economy, where lending to households has increased at a rapid rate and the Swedish banks have become increasingly dependent on funding from the international capital markets, he questioned whether the new regulations are enough. He said that in any case there are good reasons for Swedish authorities to consider whether we ought to adopt extra measures or proceed more quickly than planned in Basel III.

He listed a number of possibilities including bringing forward the introduction of the new liquidity standards, adding requirements for liquidity matching per currency, introducing reserve requirements to dampen lending to households and raising the risk weighs for mortgages.

In his final remarks, Mr Ingves noted that there are a number of areas that are not covered by Basel III but that will be keenly discussed in the future. These include how we should handle banks that encounter problems, what approach we should take to systemically-important participants and how we should solve the challenges set by cross-border banking.

Read the speech in full in the PDF below.