Stefan Ingves: Basel III is simpler and stronger Op-ed by Mr Stefan Ingves, Governor of the Sveriges Riksbank and Chairman of the Basel Committee on Banking Supervision, published in the Wall Street Journal, 15 October 2012. *  *  *  The economic cost of the global financial crisis during the past five years has been frighteningly large. One clear lesson from the crisis is that regulatory capital requirements for the banking system were too low. Or in other words, leverage was too high. Under the pre-crisis rules, banks were allowed to increase their leverage to unprecedented levels. This increased risk in the financial system and when the crisis hit, the implicit guarantees resulted in massive public bailouts around the globe. The Basel Committee’s capital reforms, known as Basel III, substantially raise capital requirements from pre-crisis levels to reduce the probability of bank failures and the associated risks to taxpayers and to financial stability. Recently, much has been made of the perceived shortcomings of Basel III. Some argue that Basel III, which comes into effect next year, is not enough. Others argue that Basel III is too complex and should be replaced by a simple leverage ratio, calculated as tangible equity to non-risk weighted assets. In my view, the Basel III agreement fundamentally enhances national and global financial stability by both raising the level of capital required by banks, and by simplifying the regulatory framework. It is no small task to reach a global consensus on these often quite technical matters.

While this is most visible for financial centres and very open small economies where global firms are large relative to the size of the domestic economy, these factors are also increasingly relevant for understanding the macroeconomic statistics of the euro area and other large economies. Complex cross-border production and ownership arrangements, such as contract manufacturing and merchanting, affect the measurement of the balance of payments and the national accounts through the booking of exports of goods that are neither produced domestically nor cross the border of the domestic economy. Moreover, transfer pricing – the pricing of the various transactions involved in intragroup crossborder production arrangements – substantially affects the amount and location of profits booked. Over time, the location of corporate structures has become increasingly mobile. This has been partly driven by fiscal and regulatory arbitrage incentives that motivate the re-domiciliation of headquarters and the geographical optimisation of the legal registration of intangible assets such as patents and copyrights. Intellectual property products (IPPs) have a high degree of cross-border fungibility and are of central importance not only for digital companies but also for other industries, such as pharmaceuticals. IPPrelated transactions, which primarily reflect the operations of a small number of large companies, have had a marked effect on the services component of the euro area current account balance and were also  visible – especially before the pandemic – in the euro area national accounts, where these appear as high imports of services and gross fixed capital formation (Charts 1 and 2).