Resilient by design: why strong rules still matter

Remarks by Erik Thedéen, Chair of the Basel Committee on Banking Supervision and Governor of Sveriges Riksbank, at the International Business Forum / International Conference on Financing for Development, Sevilla, 1 July 2025.

The title of the forum today – "financial regulation in a changing environment" – could not be timelier. We are living through a period of profound change. From the accelerating pace of technological innovation, to shifts in the structure and shape of the financial system, to increasing geopolitical fragmentation, the environment in which banks operate is evolving rapidly and often unpredictable.

So it is natural to ask if existing regulations are "fit-for-purpose" or whether they need to evolve. The phrase "fit-for-purpose" is an appealing one. It connotates adaptability, agility and appropriateness. What's not to like? But as with most appealing phrases, it's worth asking: fit for whose purpose? And fit for what kind of future?

History suggests that "fit-for-purpose" has often been a euphemism to trim, loosen and "modernise" regulation. For rolling back hard-won safeguards under the banner of efficiency or innovation. For favouring short-term gains at the expense of medium-term prosperity. I do not think that we should pursue such a path. The financial system does not become resilient by cutting corners. It becomes resilient by preparing for storms.

To be clear, "fit-for-purpose" should not mean "fit-for-the-past". A regulatory framework that does not evolve becomes an artefact and not a safeguard. We cannot sail tomorrow's storms using yesterday's charts. The 50-year history of the Basel Committee has been one of adapting to a changing financial landscape, learning lessons from banking crises and building trust by engaging with a wide range of stakeholders across jurisdictions and sectors.

Hence, the Basel Committee has a forward-looking approach to identify and analyse risks and vulnerabilities to the banking system to safeguard resilience. In particular, the Committee is investigating banks' interconnections with non-bank financial firms and is taking note of the rapid growth of private credit in some jurisdictions. In addition, the Committee is also analysing the implications of the ongoing digitalisation of finance –something which is becoming increasingly important in many economies.

And, as policymakers, we should remain humble and open to empirical evidence. When designing the Basel III standards, the Committee made no fewer than 35 key adjustments to the reforms relative to the original proposals, including in areas related to specialised lending and small- and medium-sized enterprises. We also conducted a thorough evaluation of the Basel III standards that have already been implemented.

So what does the Basel III experience suggest for "fit-for-purpose" regulation, including when it comes to the important topic of development finance? I'll draw three takeaways.

First, the true purpose of prudential regulation is to serve the real economy. It's about having a healthy and resilient banking system that can absorb shocks and lend to households and businesses in both good and bad times. Strong rules are not a constraint. They are an investment in confidence, trust and long-term growth.

There is now unquestionably strong empirical evidence that shows that it is strong banks – those that are well capitalised and have robust liquidity levels – that can support the economy and contribute to its medium-term prosperity.

There have been over a dozen episodes of market dislocations over the past decade. Unlike the Great Financial Crisis, the banking system was not at the heart of these gyrations and did not amplify them. This was not a coincidence, but a direct reflection of the stability brought by Basel III. What this means is that financial stability is a foundation, and not a constraint, for development finance. Sustainable development finance depends on a resilient banking system. If we undermine that resilience in the name of development, we risk repeating past mistakes that hurt the very countries that we are trying to support.

The Basel Framework already provides a risk-sensitive approach to development finance. No fewer than 16 multilateral development banks (MDBs) benefit from a 0% capital risk weight. Any MDB is free to apply to the Committee for it to consider whether it meets the criteria to benefit from such a treatment. In a similar vein, the Basel III standards set out a more granular and risk sensitive approach relative to Basel II when it comes to project finance. So it is in banks' and MDB's own interest for all member jurisdictions to implement Basel III in full and consistently.

The Basel Framework also recognises the risk-reducing effects of mitigants such as insurance or guarantees, subject to meeting certain criteria. These criteria are risk-sensitive by design, as the objective of the framework is to reflect the actual riskiness of a bank exposures. For example, if there is a possibility that a guarantee will not cover or absorb losses unconditionally for a bank, then it is not prudent, nor risk sensitive, for a bank to assume that the risk has actually been transferred.

Second, financial stability demands global solutions, not national shortcuts. In banking regulation, geographic borders may exist, but risks don't respect them. This is why the work of the Committee is a team sport, one of cross-border collaboration and cooperation. Having a global level-playing field goes a long way to ensuring that bank regulation is fit for purpose. We either strengthen together or weaken apart.       

The Committee is always ready to engage constructively with external stakeholders. But any dialogue must be evidence-based, globally consistent and avoid creating fragmentation or regulatory arbitrage. Our responsibility is to safeguard financial stability for all jurisdictions – developed and developing alike.

Third, regulation, no matter how fit for purpose, can only take you so far. The first and most important source of resilience comes from banks' own risk management practices and governance arrangements. And regulation must be complemented with strong and effective forward-looking supervision.

 So in the context of development finance, let's not make Basel III the scapegoat for deeper challenges. Often, what limits banks' co-investment with multilateral development banks isn't capital rules. Other factors – such as the pipeline of viable projects, banks' own risk appetite and national infrastructures – are likely to be more important in driving banks' lending decisions.

Let us therefore make sure that we cast a wide net and pursue a holistic approach to promoting sustainable development finance.