Stephen Cecchetti

In 2023, US regulators proposed the "Basel Endgame," a long-awaited overhaul of bank capital requirements. The proposal aimed to bring the United States into compliance with international standards established by the Basel Committee on Banking Supervision in response to the 2008 Global Financial Crisis. However, fierce industry opposition to what banks viewed as a costly increase in capital requirements effectively killed the proposal. In this essay, we describe the purpose of bank capital and the history of international standard-setting in bank regulation. We then highlight the most important aspects of the Basel Endgame, as well as the arguments for and against adopting the rule. We show that the debate unnecessarily conflated two distinct questions: (1) whether the United States should comply with international regulatory standards, and (2) whether the United States should raise large banks' capital requirements. While there are strong grounds to answer both questions in the affirmative, they need not be addressed together. That is, the United States can implement international standards in a capital-neutral manner to preserve global cooperation in bank regulation, leaving the separate question of raising capital requirements for another day.

In this report, we discuss the implications of the rapid development and widespread adoption of artificial intelligence (AI) for financial stability. Sizeable corporate investments have made advanced AI capabilities like large language models (LLMs) such as ChatGPT, Claude and Gemini widely accessible. Some currently boast 800 million weekly active users. This proliferation of easy-to-use tools is leading to the rapid integration of AI into corporate processes, though there is little consensus on how to do so effectively. Our report emphasises that while AI offers substantial benefits, including accelerated scientific progress, improved economic growth, better decision making and risk management and enhanced healthcare, it also generates significant concerns regarding risks to the financial system and society. AI's ability to process immense quantities of unstructured data and interact naturally with users allows it to complement and substitute human tasks, potentially revolutionising how work is organised. However, this comes with risks such as difficulty in detecting AI errors, inherited biases, overreliance and challenges in oversight

In the aftermath of the 2007–9 global financial crisis, the global standard setting process evolved into a comprehensive policy development cycle with collaboration across various international organizations. The Financial Stability Board (FSB) and the Standard Setting Bodies (SSBs) have responsibility for identifying needs for additional regulation or further harmonization; proposing, assessing, and agreeing on standards; implementing rules; and evaluating impact prior to proposing refinements. The International Monetary Fund (IMF) contributes to the analysis through its participation in the various organizations and bringing its analytical capacities to bear on a variety of macro-financial questions, and providing an independent voice.

"Preface The world of money, banking, and financial markets is constantly evolving. Every year, people ex-plore new ways to pay for purchases, save for the future, and borrow to meet current needs. New technology is an ongoing source of change. Internet banking makes it easier than ever for individuals to take control of their finances. And smartphones not only allow American college stu-dents to pay for their morning coffee but also are giving hundreds of millions of people in poor countries their first access to the financial system. In some instances, crises provided the impetus for change. For example, new regulations aimed at making the financial system safer have pushed many banks to take fewer risks than they did just a few years ago. Financial markets also have become more resilient and less likely to need public support. And monetary policymakers, especially in places where economic growth has slowed and deflation is a risk, have adopted a slew of policies never seen before. In much of Europe and Japan, interest rates have fallen below zero-breaking through what had long been seen as a permanent -barrier-while new policies are in place to boost bank lending and restore inflation and growth to precrisis levels"--

There is growing recognition that prolonged U.S. monetary policy easing has extraterritorial spillovers, driving up financial system leverage elsewhere in the world. Faced with financial stability threats that are not of their own making, what can these countries do? Specifically, is there a role for macroprudential tools, capital controls or foreign exchange intervention in safeguarding financial stability from risks arising externally? We examine the efficacy of these policy interventions by exploring whether preventative or reactive policy interventions can mitigate such risks. Using a sample of 950 bank and nonbank financial firms across 28 non-U.S. economies over the past two decades, we show that if policymakers are able to implement policies prior to an additional consecutive decline in U.S. interest rates, financial institutions do not increase their leverage by as much as they otherwise would. By contrast, it is more difficult to counter the spillovers with reactive policy interventions.