BIS central bankers’ speeches  5  But the structure of the Swedish banking system calls for greater safety margins Although the new regulatory framework will strengthen resilience in several ways there are structural vulnerabilities in the Swedish banking system that mean that the safety margins provided by the Basel III framework are not enough in all respects. As every country’s financial system and banking system are unique and have their own special characteristics and vulnerabilities, the basis of the Basel frameworks is that the regulations are minimum requirements. Countries that believe it is necessary to set stricter requirements can and should do so. In my opinion, the size and high degree of concentration of the Swedish banking sector, as well as the banks’ extensive dependence on both foreign and domestic market funding, create vulnerabilities that justify complementing the internationally-agreed frameworks. The high and growing indebtedness of the Swedish households poses further risks to the financial system. All-in-all, this justifies Sweden taking action sooner and having stricter regulations in certain respects. On the basis of several of these factors, the Riksbank has recommended, together with Finansinspektionen and the Ministry of Finance, that from 1 January next year the major Swedish banks should have CET 1 capital ratios of at least 12 per cent. This is significantly higher than the requirement in the Basel III framework. Several other countries with large banking systems have for similar reasons introduced or are discussing higher capital requirements for their banks. Two closely-related examples are Switzerland and the United Kingdom.

Lending standards are thus geared to detecting the future ability to pay or, otherwise expressed, to measuring the credit risk of customers and firms. Banks also measure and manage other conventional risks, such as market and operational risk. But, to date, they will not have been fully considering the so-called physical risks, arising from the direct effects of climate change, and 1/3  BIS central bankers' speeches  they will have only partly weighed up transition risks, stemming from public policies and regulations, technological change and decarbonisation-related behaviour. I should stress that the incorporation of these new elements into the traditional management of bank risks poses no conflict whatsoever; the opposite is rather the case. Both physical and transition risks can ultimately affect bank customers’ solvency and the value of certain assets, which may be either traded or used as collateral. In addition, they may also experience an increase in the frequency and severity of weather-induced operational events. It is widely acknowledged that the transformative measures to change our productive model will affect bank borrowers. In some cases, opportunities will arise, but we cannot hide the fact that these changes will bear down negatively on certain sectors’ business models. By incorporating these elements into banks’ measurement of their classic risks, we pursue two goals. First, to improve the sensitivity and robustness of the management framework and, further, to promote the process of transition in the economy thanks to this better risk discrimination.