Introduction
Beginning 90 years ago, in the 1930s, in large parts of the world, central banks took on the role of supervising commercial and savings banks in their jurisdictions, as governments stepped in to guarantee a minimum level of deposits to reassure savers and stabilize the financial system. Runs on banks to withdraw hard-earned savings had occurred over the centuries, destabilizing economies and ruining businesses and families alike.
For consumer depositors, this new government responsibility provided certainty up to the stated amount, backed by the public purse. The price of that precious government deposit guarantee was for bankers to submit to central bank inspections of the quality of their assets. The bankers kept discretion over their lending practices, which is a commercial matter for them. But the bank balance sheets were open to regular inspection.
Interconnectedness
International trade and financial ties have gone hand in hand for millennia, and so the interconnections in societies and financial institutions have been with us since recorded time. One of the first banks to collapse after the 1929 stock market crash in New York was the Kreditanstalt in Vienna, across the Atlantic.
As financial systems and economies evolve, the same question arises in new clothes. Moving to the post-World War II era, technology led to ever greater connectedness in the global financial system. Competitive bank lending across borders grew rapidly; it depended, as always, on the size of the lender's balance sheet. In 1970, Bank of America had the largest balance sheet in the world, at some US$25 bn. By 1980, the answer was less clear. Determining the rankings of global banks was complicated due to varying accounting standards, even as the macro phenomenon of the decade was the strong growth of Japanese and European banks on the world stage. There was no way to draw up comparable accounts – what one did see and feel, though, was the power and the commercial competition of cross-border lending. In support of its central bank owners and their responsibility for stability, the Bank for International Settlements began to collect cross-border exposure data far more comprehensively and to define what the reporting data had to be, in order to arrive at some coherence for supervisors.
The First Basel Capital Requirements
Regulatory capital is a cost for a bank.
The central bankers established a committee in Basel under the guidance of Peter Cooke of the Bank of England, the public topic being fair competition amongst these huge global players. If one giant was operating off a far lower – and so cheaper – capital base, then the global playing field was not level. The context matters: given the bubble building in Japan,[1] there was much public finger-pointing in that direction, while far less was said publicly about the risks of instability or collapse. Perhaps the central bankers kept those worries to themselves.
The Cooke Committee Report was published in July 1988 and became known as Basel I. It was followed over the years by Basel II and, more recently, Basel III. The question has always been the same. How much regulatory capital does a publicly supervised bank have to hold to keep the deposit guarantee? It is the circumstances of financial markets that have evolved.[2]
For those balance sheets, some assets are riskier than others. The risk run by a bank to put its money in sovereign treasuries is not the same as the risk entailed in buying another government's treasuries, let alone lending to a blue-chip enterprise in its country versus one in another country and currency, and then on to the entirely different risks inherent in small businesses and consumer finance for varying terms. The central bankers argued out risk ratios and assigned capital requirements to offset those different kinds of assets and their risks. Logically, a less risky asset should be backed by less bank capital; the difficulty is determining the "fair" risk weighting. Banks, after all, are profit-making institutions – with the complication of their funding being in good part government-backed.
In 2025, the UBS Question Updates the Problem
"The talks with Bessent are part of an ongoing effort by Kelleher [UBS chief executive] to put pressure on the Swiss government over proposed capital requirements that would force UBS to hold an additional $26bn of capital, a move UBS has described as 'extreme' and disproportionate."[3]
The Swiss public purse would be unable to guarantee even a portion of UBS's client deposits, because this global giant's balance sheet is far larger than the entire Swiss economy. Switzerland's decision to impose stricter capital rules coincides with the siren calls from Wall Street to Washington in the opposite direction, urging deregulation and looser capital requirements.
The US Treasury secretary has cited the growth of private credit as evidence that public lenders have been constrained by Basel III capital requirements and by global liquidity requirements. In this administration's view, the goal is to free up more space for lending. Not surprisingly, there is little mention of the liability side of those balance sheets, which are partly government-backed. No one remembers or speaks of the 2008 public bailouts when the US banks went off the rails.
For more than three decades, the Basel requirements have led banks, ironically, to grow revenue in other areas, not least through vast amounts of securities trading and, indirectly, to encourage private credit extension by non-bank actors.
There are alternative scenarios. Readers may want to think about organizing the regulated banking system differently. In 2013, economists Anat Admati and Martin Hellwig sketched a very different and workable approach to banking in "The Bankers' New Clothes."[4]
For WAIFC Members
Bankers in IFCs have to be concerned about efficiency, profitability, and risk, of course, as well as international competition and the regional and global playing field. The authorities must be concerned about those balance sheets and what they contain. The financial and commercial environment can change rapidly, challenging bankers' initial assessments, and externalities can unexpectedly arise from across the border.
Who should bear what costs? The debate is global and fundamental to financial services.
[1] At peak bubble, theoretically the land value of the Imperial Palace in Tokyo was worth as much as all the land in Florida.
[2] https://www.bis.org/bcbs/history.htm
[3] Financial Times, 18 November 2025
[4] The Bankers' New Clothes: What's Wrong with Banking and What to Do About It by Anat Admati and Martin Hellwig, Princeton University Press, 2013. The argument is that the banking system is fragile and relies on excessive debt. A combination of misleading arguments by bankers and a fear of appearing uninformed by the public prevents meaningful changes to make the system safer. The core problem, according to the authors, is that banks are built on too little of their own capital.