Crises catalyse change, notably in the field of banking sector regulation. For most of the last two decades, the broad trend has been one of strengthening prudential regulation and rising supervisory standards--each wave of new initiatives forged amid bank failures and attendant economic disruptions. Now, however, the outlook for the global regulatory framework seems much more uncertain. We see three powerful forces that could, over time, come into conflict with prudential objectives to reinforce system resilience and maintain financial stability:

Mounting calls for simplification.  At 1,845 pages, the Basel framework is dense and complex, and this page count does not include the numerous guidelines and best practices reports published over time. For banks, the burden of compliance has grown over time, especially for smaller banks and those operating in multiple jurisdictions. Under our base case, we anticipate renewed efforts to cut red tape in many jurisdictions. These changes can be neutral to bank ratings if they do not hinder pragmatic and effective supervision or reduce banks' incentives to pursue effective risk management.

A growing sense of regulatory accomplishment.  A fair but very general characterization is that developed markets' banking sectors are now in good shape--well-capitalized, sustainably funded, reasonably profitable, and sustained by ever-more-sophisticated risk management. Even in Europe, having emerged from years of poor profitability, the sector is confident. At the same time, the failure of several large banking institutions in the U.S. and Switzerland in 2023 led to calls for changes to local rules, but no major reset of the global regulatory framework. A worse outcome in the Swiss case may very well have kick-started more questions about the global framework. Contagion effects were contained, however, by the ensuing swift, government-engineered market solution. Broadly, we think the pervading sentiment that banks are now healthier will likely generate some headwinds against any new regulatory initiatives. Aligned with other dynamics, new initiatives may stall. A prime example is the supervision and management of climate-related risks for which the Basel Committee on Banking Supervision (BCBS) recently failed to agree on a final policy document. In the short term, a regulatory statis would not necessarily weigh on bank ratings, but could do so over time if risks evolve but regulation and supervision do not.

Wider political goals subordinating prudential objectives.  Bank regulations are devised by technocrats, passed into law by politicians, and enforced by supervisors. Given banks' central role in economic wellbeing, reformulations of the regulatory framework reflect political considerations to a degree. Asia-Pacific's last sovereign and banking crisis was in 1997; the 30th anniversary approaches. In Europe, the last banking crisis ended only a decade ago. In the U.S., it's less than two years since the last period of turmoil. But faced with slowing economic growth, shifting patterns of international trade, and the rapid growth of shadow banks, competitiveness, proportionality, and supervisory pragmatism are now the mantras--from some political quarters and policymakers, as well as from bankers. Received wisdom among some these days is that regulation is a barrier, not a facilitator, to economic growth. We believe this view is short-sighted and ignores the long-term benefits to economic growth that follow stability and confidence in financial markets. Bank supervisors tend to push back on easing key regulatory standards, but several have competitiveness as a secondary objective, and bankers are increasingly willing to challenge regulation or supervision that they perceive to be overreaching. A substantial regulatory rollback is not our base case, but we are mindful that this risk always exists, as experience has shown. Of the three forces analysed here, we view this one as both the least likely to materialize and potentially the most impactful for bank ratings.

Under our financial institutions methodology, we view strong prudential regulation and effective supervision as fundamental to banks' credit strength. Rising prudential standards have supported stable or improving ratings in the sector over the past decade. Today, we see regulatory trends at a crossroads. Our current base case anticipates some regulatory stagnation, with some simplification at the margins. A broader push to significantly weaken bank regulation and/or limit the effectiveness of supervisory action is a downside risk which, unlike regulatory strengthening, is unlikely to play out in a globally coordinated manner but, instead, stem from specific national initiatives. This is what we will be looking out for in 2025.

More complex financial systems call for constant regulatory evolution.  The nature of the financial system has transformed since the global financial crisis. Sometimes changed regulation has led to industry change, sometimes industry change has led to changed regulation. Despite the improvement in fundamental credit strength in the sector over the past two decades, as some risks ease so others emerge. These include the potential direct and indirect risks arising from the non-bank sector; digitalization and new technologies that can ease but also aggravate business and operational risks; and climate change. In their various roles as credit providers, stores of value, and payment facilitators, banks face competition from all angles.

Banks are also living organisms that are controlled by cultures, standards, and norms, but shaped daily by their managers and employees. Layers of regulation, while individually well-intended and justified, can lead to unintended consequences and complexity that is the enemy not only of efficiency but also compliance. Bank regulation and supervision are therefore never going to be "one size fits all", nor will they be "once and done". We therefore monitor how authorities factor in regulatory or industry change, and in turn adapt their frameworks and practices to match evolving risks.

Despite and because of tougher regulation since the global financial crisis, the banking sector is generally in good health.   The effective trebling of bank common equity capital requirements, the tightening of liquidity requirements, rising competition from nimble fintechs, and deepening disintermediation by nonbank lenders could have undermined banks' profitability. Nevertheless--through skilful management, heavy investment, business model refinement, and consolidation--managers have proven up to the challenge of balancing stakeholder objectives and optimally directing scarce resources. We expect most rated U.S. and European banks will report a solid return on equity of around 10%-12% (and sometimes much higher) in 2025--above or in line with their cost of equity. The rebound in equity valuations and supportive credit spreads further confirm that most of these banks are investible. The short-lived nature of the 2023 disruption and its non-escalation in Europe was the product, not only of the heterogeneity of many banking systems, but also the confidence that creditors can have in reported bank balance sheets.

Now more confident of their financial standing, some banks are calling for a degree of regulatory simplification.  They are challenging certain supervisory tools, such as stress tests--including in court--for their perceived opacity. Some regulators are responding by lowering the frequency of such tests or making methodological changes to increase transparency. What's more, many banks advocate for more proportionality in banking rules and supervision, saying that smaller or less complex institutions should face simpler supervision. For example, the U.K. authorities have recently announced a simplified prudential regime for small banks with balance sheets below £20 billion. The U.S. has employed a tiering approach since 2018-2019.

Another bone of contention is the streamlining of reporting requirements and the supervisory approval process. In the EU, the Commission is currently reviewing its regulatory framework for securitisation. In its related proposals to the Commission, the ECB for instance has put forward the idea of reducing transparency requirements for private securitization; the ECB is also working hand-in-hand with the industry to fast-track the recognition of significant risk transfer for the simplest transactions. In our view, such efforts to increase the efficiency of the supervisory process and simplify rules could be neutral for bank ratings if they do not impair supervisors' capacity to respond, or reduce banks' incentives to conduct adequate risk management.

Beyond simplification, a form of regulatory stasis is emerging; the difficult finalization of the Basel III implementation being a prime example.  Now seven years after the Basel Committee agreed it, Basel III is supposed to be in its end phase. But whereas key signatories delivered the earlier implementation waves that brought in new concepts like the liquidity coverage ratio and the net stable funding ratio, and a handful of jurisdictions (like Japan and Canada) completed the job, it's becoming clearer that when it comes to Basel, nothing is final until everything is final. First were the delays, now all eyes are on what form, if any, the U.S. implementation will take. Given the hiatus, the U.K. recently pushed back its start date by another year, and the Canadian regulator (OSFI) has frozen the output floor at 67.5% until further notice. The question here is less whether the U.S. will make targeted deviations from the Basel standards--after all, this is routine practice in several jurisdictions, with some choosing to gold-plate the standards and some being less demanding--but more if and when it will implement the key tenets, such as the Fundamental Review of the Trading Book. Bankers and regulators alike remain keenly aware of the importance of a level playing field to facilitate the competitiveness of internationally active banks.

The mood across the global banking landscape concerning the potential direction of bank regulation is far from uniform.  The regulatory community does not view a major reset of the global framework as necessary in the wake of the March 2023 events in the U.S. and Switzerland. Nevertheless, regulatory stasis and a political calculus that deregulation could spur competitiveness are not universal themes. For example, across developed markets in Asia-Pacific there appears to be less appetite for potential lighter-touch regulation compared with the U.S. and Europe. Aside from the three large Japanese banks and the large Hong Kong-based subsidiaries of European banks, many developed market SIBs in Asia-Pacific are domestically focused national champions. Most operate outside domestic borders primarily to support the overseas banking needs of their domestic clients and have limited ambitions to be globally competitive as an end in itself. Furthermore, regulatory stasis is less likely to occur in emerging market banking systems. China, for example, continues to raise the bar for domestic banks, bringing them closer to global norms.

For now, our base case assumes that bank regulation globally is unlikely to move in lockstep.  Europe and the U.S. may see a form of regulatory stabilization rather than a significant rollback, but this risks a failure to learn from 2023, and targeted easing may escalate. Banks remain highly confidence sensitive at heart, as well as highly leveraged. If they spread their resources--liquidity, funding, and capital--more thinly, grow faster, and take on more risk, they may outperform on profitability (in the short term at least) but there is no upside for creditors. Undoubtedly, stronger banking regulation and supervision since the global financial and eurozone sovereign debt crises have reinforced banks' risk management, balance sheets, and investor confidence, and so have supported credit quality in Europe and the U.S. Specifically, capitalization--seen through the lens of our risk-adjusted capital methodology--is now a credit strength for most rated European banks, and comfortable for many others around the world. That said, if these well-capitalized, profitable banks were to hold even more capital than that envisaged by Basel III, there may be limited credit upside because this could challenge them to deliver sufficient shareholder returns.

The lessons from 2023 remain fresh--some classic risks poorly managed by a few banks, but also with identified gaps in regulation and supervisory effectiveness, including in the crucial area of liquidity risk. Our ratings assume that these gaps will be filled. In Switzerland, at least, there appears to be a strong political and regulatory intent to do so. In the EU, competitiveness is high on the political agenda, but current policy priorities center on harmonization and other structural measures to improve capital mobility. U.K. regulators (which have a secondary growth and competitiveness objective) are considering targeted easing. All eyes are therefore on the U.S. Here, the application of the Basel standards and resolution planning depend on size, regulations, and supervisory effectiveness, and could be legally challenged following the June 2024 U.S. Supreme Court's Loper Bright judgment. The Fed is looking to improve the transparency of its stress testing and potentially reduce the volatility of the capital requirements that result, and the final Basel III implementation will likely pull back from the gold-plating envisaged by the original proposal or take a more radical tack. By the end of 2025, global banking regulation's direction of travel will have become much clearer.

Related Criteria & Research

Criteria

• Risk-Adjusted Capital Framework Methodology, April 30, 2024
• Financial Institutions Rating Methodology, Dec. 9, 2021
• Banking Industry Country Risk Assessment Methodology And Assumptions, Dec. 9, 2021

Research

• European Bank Outlook 2025, Jan. 28, 2025
• Swiss Banking Outlook 2025: Strong Foundations, New Pressures, Jan. 20, 2025
• U.S. Bank Outlook 2025: Entering A New Phase Under A New Administration, Jan. 15, 2025
• Global Banks 2025 Outlook, Nov. 14, 2024
• Global Banks 2025 Country-by-Country Outlook, Nov. 14, 2025
• European Banks' Resolution Story Moves To The Next Chapter, Sep. 25, 2024
• Phasing Out Bank AT1--An Australian Solution To An Australian Dilemma, Sep. 18, 2024
• The Role Of Bank AT1 Hybrid Capital One Year On From The 2023 Banking Turmoil, June 26, 2024
• 2023 Banking Turmoil: Global Regulators Reflect And React, June 26, 2024
• Swiss Federal Council Plans To Strengthen The Country's Too-Big-To-Fail Banking Framework, May 29, 2024

Appendix: A Mixed Regulatory Agenda In Key Jurisdictions

Basel Committee for Banking Supervision (BCBS)

In its recently published 2025-2027 work program, the BCBS says that the full, timely, and consistent implementation of Basel III standards remains its top priority. Further, the BCBS intends to provide practical tools to supervisors to better supervise liquidity and interest-rate risks in light of the events of 2023. As for new banks' liquidity rules, the BCBS has not committed to any formal review and proposals, but rather has indicated that it may reconsider the rules over the medium term. In addition, the BCBS mentions the continuity of several analytical initiatives on a variety of topics, such as the interconnections between banks and non-banks or the impact of artificial intelligence. The topic of climate-related bank disclosures was omitted in this work program; the 2023 consultation paper on this topic has still not resulted in a final proposal, with press reports mentioning disagreements from U.S. authorities. The BCBS has however reaffirmed its intention to issue final proposals in 2025.

Overall, we think the limited global appetite for further regulatory change can be seen in the relatively timid ambitions of this BCBS work program for the two years ahead.

U.S.

Following the bank failures in the first half of 2023, U.S. regulators indicated they would take several steps to tighten regulation and supervision. They made proposals to implement the final set of Basel III standards and to require more large banks to issue long-term debt for resolution purposes. They also signalled they would update liquidity rules pertaining especially to uninsured commercial deposits and make certain other enhancements. However, they have largely not finalized nor implemented those changes, and we believe the Trump administration's ability to make leadership appointments to the banking regulatory bodies substantially reduces the likelihood that regulation will be materially tightened, as it looked like it might following the 2023 failures. The new administration will make nominations for the top supervisory job at the Fed as well as for chairs at the other two large regulators. We expect the intentions of the regulatory bodies to become clear in the coming months once their top leadership roles are filled.

U.K.

The government's increased emphasis on regulators' secondary growth and competition objectives has contributed to several changes in its approach to the banking sector. Recent examples include delaying the start date of the Basel 3.1 regime until January 2027 to allow time to see where the U.S. Basel III Endgame ultimately lands; reducing the frequency of solvency stress tests; simplifying the prudential regime for small banks; streamlining regulatory reporting; easing restrictions on bankers' remuneration; and possible changes to mortgage underwriting rules that constrain lending to higher risk borrowers. We think these changes do not materially weaken the U.K. regulatory framework, but we will continue to monitor developments, including any potential dilution of the Basel 3.1 regime in response to the U.S. outcome.

EU

The revised Capital Requirement Directive (CRD) and Capital Requirement Regulation (CRR) came into force on Jan. 1, 2025, finalising the implementation of Basel III standards in the EU, except for the Fundamental Review of the Trading Book. The implementation of the latter was postponed to 2026 given delays in the U.S. implementation of Basel rules. The implementation of the new CRD/CRR calls for many additional regulatory texts that will be a key focus for European regulators in the years to come. Another area of focus is the implementation of the Digital Operational Resilience Act, which entered into force in January 2025 and provides an oversight of critical third-party providers.

Overall, EU authorities have not announced any major revamp of banking rules. The ECB, in charge of the supervision of the large euro area banks, announced a review of its main supervisory methodology, including how it sets additional capital requirements, to move toward a more risk-based approach. The ECB is also working with other EU authorities to reduce regulatory costs by designing an integrated reporting framework.

Switzerland

Following several official reports after the collapse of Credit Suisse, Switzerland's regulatory landscape is set for an overhaul. We expect profound changes to governance standards, capital requirements, liquidity access, regulatory powers, and the SNB's role as lender of last resort. However, it remains to be seen how regulators will make use of their extensive toolkit. Proposed revisions to the country's too-big-to-fail framework would increase regulatory requirements for systemically important banks while strengthening the regulator's supervisory powers and giving it more crisis-management options. In our view, the main effect of the proposals would be to align Swiss bank regulations more closely with those in comparable jurisdictions, such as the EU and the U.K. That said, some of the revisions would mean tighter rules than those in other banking systems. However, applying the proposed rules, especially to larger banks, would require a cultural change in regulation and we have yet to see how the Swiss Financial Market Supervisory Authority would apply its expanded powers. The final Basel III standard entered into force in Switzerland on Jan. 1, 2025.

Australia

The most noteworthy recent development is that the Australian Prudential Regulation Authority (APRA) confirmed on Dec. 9, 2024, that it will phase out Additional Tier 1 (AT1) capital instruments. So far, Australia is the only developed banking market system that will not include banks' AT1 hybrid securities in a bank's Tier 1 regulatory capital. Our view is that APRA's proposal--which is a form of regulatory tightening rather than stabilization--is unlikely to be widely replicated. The APRA initiative was in response to March 2023 lessons from the U.S. and Switzerland, and reflects APRA's view that the phase out of AT1 will simplify and improve the effectiveness of bank capital in a crisis. This is mainly because most other countries do not have such a high exposure of retail investors to AT1 securities as Australia. More generally, over the last 20 years, APRA has been at the forefront of implementation of Basel standards, and often flexes its national discretion to embrace more conservative standards than global norms. We foresee no material deviation from a continuation of this approach. Furthermore, we currently envisage no material watering down of the pervading strong banking regulatory and supervisory environment associated with ongoing Australian industry debates. These include industry discussions on high house prices (which impacts first-home-owner borrower affordability); and the closure of rural bank branches.

China and India

Over the past seven or eight years, China has passed many regulations affecting all aspects of the financial services sector including banks, finance and leasing companies, asset management companies, insurers, and securities companies. We believe regulatory back sliding is unlikely as China shocks its institutions into aligning with international practices and as its largest institutions are on track to meet global systemically important bank requirements.

In India regulators have clamped down in recent years and have lifted regulatory and supervision standards. This has contributed meaningfully to a progressive reduction of nonperforming assets from previous highs, by international standards. We believe the impetus for better and higher standards will persist.

Latin America

In general, regulators in Latin America have implemented the Basel standards later than in Europe and the U.S. In many instances, these standards have been adopted in a hybrid manner, blending Basel guidelines with a customized approach to addressing the higher risks posed by the volatility and higher credit losses of the region's economies. For this reason, advanced internal model approaches for calculating credit risk have not been implemented, with the aim of maintaining higher capital levels. Additionally, several countries are still in the process of implementing Basel III, and some are lagging significantly. Nevertheless, regulators in the region generally maintain conservative minimum capital requirements to ensure that banks are prepared to absorb losses during times of stress, given regional conditions that are characterized by volatile economies and high levels of expected losses.

Related Research

• Systemic Risk: Global Bank-Nonbank Nexus Could Amplify And Propagate Market Shocks, Feb. 18, 2025
• Systemic Risk: U.S. Banks' $1 Trillion In Loans To Nonbanks, Like Private Credit, Creates Risks And Rewards, Feb. 18, 2025
• Systemic Risk: Private Credit's Characteristics Can Both Exacerbate And Mitigate Challenges Amid Market Evolution, Feb. 18, 2025
• Systemic Risk: Global Nonbank Financial Institutions Press Ahead, Feb. 18, 2025
• Systemic Risk: Global Banking Regulation At A Crossroads, Feb. 18, 2025