Haruhiko Kuroda: International financial regulation and supervision
- past achievements, current issues, and future agendas
Remarks by Mr Haruhiko Kuroda, Governor of the Bank of Japan, at the 2019 Paris Europlace
International Financial Forum, Tokyo, 28 November 2019.
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Introduction
I am very honored to have the opportunity to speak at the Paris Europlace Financial Forum again
this year. This is a valuable forum for exchanging ideas on interesting topics such as global
financial regulation, financial innovation, and ESG, which are featured today. The forum also
plays an important role in promoting Paris as a financial center. Turning to Tokyo, there is an
ongoing effort to realize "Tokyo's vision for a global financial city" and Mr. Nakaso, who appeared
as a speaker earlier today, is leading this effort as chairman of the Organization of Global
Financial City Tokyo. I think this is a valuable opportunity for interaction between the global
financial centers of Tokyo and Paris.
Over the past three years, I have talked about future challenges, such as financial innovation and
demographic changes. This year, I will change focus slightly and look back on the discussions
on regulation and supervision in the wake of the Global Financial Crisis, and then discuss issues
that are currently of particular importance. I would also like to touch on issues that are likely to
increase in importance in the future.
I. Past, Present, and Future of International Financial Regulation and Supervision
Since the Global Financial Crisis, financial institutions around the world have increased their
capital adequacy ratios under new international financial regulations, such as Basel III. These
regulations have been discussed and formulated by authorities worldwide and have helped
increase the robustness of the global financial system.
However, looking back on history, financial crises have repeatedly occurred in different forms,
often with the advent of new financial technologies. As we are not crystal gazers and cannot
foresee the future completely, we need to identify risks to the financial system in as
forwardlooking a manner as possible. Based on a deep understanding of our past experience, we must
monitor the progress of new financial innovation and changes in the environment surrounding
financial institutions. We then need to design international financial regulations so that any risks
identified do not lead to the next financial crisis. Even after global financial regulations have been
carefully formulated and implemented, their effectiveness may be impaired by progress in
financial technology and changes in the business environment. There is also the risk of
unintended negative side effects that may demand further intervention if they outweigh the
positive effects of any financial regulations. When designing global financial regulation and
supervision, the following four-step cycle must be repeated: first, designing systems from a
forward-looking perspective; second, steady implementation; third, evaluation of the positive
effects and negative side effects, taking into account new technologies and changes in financial
environment; and fourth, addressing any problems when necessary, such as when the negative
side effects exceed the positive effects.
Ten years have passed since the review of global financial regulations and supervision began in
earnest after the Global Financial Crisis. In what follows, I will first assess the regulatory
development work done during this period, particularly at the Financial Stability Board (FSB) and
the Basel Committee. Then, among the work currently underway, I would like to highlight the
importance of work on the evaluation of financial regulations. Finally, I will mention climate-related
risk as one of the challenges for future financial stability.
II. Past Achievements: Evaluation of Discussions over the Last 10 years
After the Global Financial Crisis, work on reforming financial regulations started with a review of
past crises, including the causes of each crisis. It revealed that before each financial crisis, there
had always been a build-up of debt at financial institutions and in the non-financial sectors -
socalled leverage build-up. Financial regulations were therefore strengthened in a forward-looking
manner. For example, attention was focused on the credit-to-GDP ratio, which has implications
as a leading indicator of potential problems.
There has been much valuable progress in international financial regulation and supervision over
the past 10 years, including Basel III. For example, an expansion of the Basel III framework was
made in each of its three pillars: the first pillar being minimum requirement; the second pillar,
supervisory review process; and the third pillar, market discipline through disclosure. In terms of
content, policy tools such as liquidity regulations were expanded, in addition to the previous
riskbased capital regulation. Also important was the introduction of a macroprudential perspective at
the international level. Specifically, first, a countercyclical capital buffer (CCyB) was introduced in
response to the issue of procyclicality over time; and second, the structural issue of the
"too-bigto-fail" problem has been addressed by the introduction of a new framework for identifying global
systemically important banks (G-SIBs) and a total loss-absorbing capacity (TLAC) framework.
Both of these measures are key features of macroprudential policy: the first is seen as a
response from a time-dimensional viewpoint of suppressing influence over time, and the second
measure is a response from a cross-sectional viewpoint.
III. Current Issues for International Financial Regulation and Supervision: Market
Fragmentation
Following the discussions described earlier, Basel III was finalized in December 2017. It is at
present of paramount importance that each jurisdiction fully implements international agreements
in a timely manner.
After the finalization of Basel III, work continues in terms of both the confirmation of the intended
effects of regulations and research into unintended effects, particularly in the FSB and the Basel
Committee. The ongoing assessment work takes into account the interrelationships of multiple
regulations in a more explicit way and adopts a more comprehensive and general equilibrium
perspective. This continued assessment work is extremely valuable.
The issue of "market fragmentation" is also crucial to this ongoing regulatory impact assessment
work. That is why this issue was one of the policy priorities at this year's Group of Twenty (G20)
meeting under the Japanese presidency. Some of the financial regulations that have been
designed over the past 10 years are likely to involve a degree of market fragmentation. As an
example of market fragmentation, it is often mentioned among national authorities and market
participants that regulatory responses to different OTC derivative trading markets in each country
have an impact on global derivatives market trading. Unintended forms of market fragmentation
may arise as the details of regulations and the timing of their implementation differs across
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countries. Unintended market fragmentation should be avoided because it can have a negative
effect on the stability and efficiency of the financial system. Market fragmentation is an important
consideration when conducting analysis-based policy evaluations, and its discussion with a
highlevel consideration in international forums is to be welcomed.
V. Future Agendas of International Financial Regulation and Supervision: Environmental
Problems as a New Financial Stability Issue
The progress made over the past 10 years is something to be proud of, but we must not rest on
our laurels. There are issues remaining for financial institutions other than banks - for example,
non-bank financial intermediaries that are subject to less stringent regulations. The banking
sector itself is undergoing changes in its business model due to the effects of digitalization and
other factors. These are situations that require continuous monitoring. Therefore, it is necessary
to continue the steady implementation of the four-step cycle mentioned earlier.
Against this background, I would like to mention climate-related risk as an example of a new
issue for financial stability. Nationwide efforts have continued in the recovery from the damage
caused by Typhoon No. 19 and the ensuing floods in October this year, and there has been an
increase in Japan in recent years in severe natural disasters, such as typhoons. It may not be
easy to establish a causal relationship, but some have pointed to global warming as a cause of
the increase in catastrophic natural disasters. While it is human lives that are ultimately at stake,
the impact of such disasters may also lead to a decrease in asset value and collateral value, and
the associated risk may come to be a significant challenge for financial institutions.
Climate-related risk differs from other risks in that its relatively long-term impact means that the
effects will last longer than other financial risks, and the impact is far less predictable. It is
therefore necessary to thoroughly investigate and analyze the impact of climate-related risk. If
any regulatory or supervisory response is required, the four-step cycle mentioned above should
be implemented carefully: systems must be designed from a forward-looking perspective,
implementation must be steady, the positive effects and negative side effects must be evaluated,
and any problems must be addressed as necessary. In considering the regulation and
supervision of climate-related risk, it is necessary to keep in mind to what extent industrial
policies and environmental regulations and guidelines are effective in addressing such risks.
Therefore, there may be room in this case for cooperation between the industrial sector and the
financial sector.
Climate-related risk raises both cross-sectional and time-dimensional issues: the
crosssectional problem is that carbon emissions affect a wide range of industries, and the
timedimensional problem is that this effect is a long-term problem. In the context of financial
regulation and supervision, we have shown our expertise in addressing cross-sectional and
timedimensional problems through our response to the "too-big-to-fail" issue and in the design and
operation of CCyB. In addressing environmental risks as a new issue in financial stability, the
wealth of previous discussions on financial regulation and supervision may provide some
valuable insights.
Let me also note that there is the Network for Greening the Financial System (NGFS) as a place
for global discussions related to the issue of climate change. The Bank of Japan has joined this
network and is looking forward to working with the NGFS member institutions and contributing to
the discussions. Our decision to seek membership of the NGFS was greatly encouraged by our
dialogues with Governor Villeroy de Galhau, who is also here today, and other colleagues at la
Banque de France, an institution that has always taken strong international leadership in this
area.
Concluding Remarks
In my speech today I have mentioned climate-related risk as a new issue in considering financial
stability. There are many other challenges that need to be addressed, such as cyber risk,
antimoney laundering (AML), countering the financing of terrorism (CFT), and the issue of crypto
assets.
In addressing these new challenges, I think it is important to continue implementing the four-step
cycle that has been repeatedly mentioned today. Let me conclude with a quote from a French
mathematician Henri Poincare: "Mathematics is a technique that regards different things as the
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same." Even if they seem to be different on the surface, things often share a common essence.
Thank you for your attention.
See for example in the OTC derivatives markets, Financial Stability Board, "FSB Report on Market
Fragmentation," June 2019.
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Jules Henri Poincare, Kagaku to Hoho , trans. Yoichi Yoshida (Tokyo: Iwanami Bunko, 1953), 37.