speech date : 10 november 2016 speaker : governor stefan ingves venue : the swedish bankers ’ association bank meeting, grand hotel, stockholm sveri ges riksbank se - 103 37 stockholm ( brunkebergstorg 11 ) tel. + 46 8 787 00 00 fax + 46 8 21 05 31 registratorn @ riksbank. se www. riksbank. se necessary reforms for a more stable financial sector crises are expensive and should be avoided when financial crises afflict us it becomes obvious to all how much damage they cause. unfortunately, this insight is often temporary, as it is easy – even a human survival instinct – to forget problems and leave them behind us. as a representative of the basel committee i therefore see it as an important task to remind you of how costly financial crises are to the national economy and how important it is that we have robust regulatory frameworks that reduce both the cost of crises and the probability that they will occur. although we often see a return in the growth rate of the economy, crises usually lead to a permanent fall in gdp, which takes a very long time to recover from. even today, almost 10 years after the financial crisis broke out, many countries are struggling with low growth, high unemployment and low inflation. in several cases they also have high sovereign debt. and in the case of sweden, there is no other event since the second world war that has affected swedish gdp as negatively as financial crises. there are two clear dents in swedish gdp post - war development : during the financial crisis in the 1990s and during the global financial crisis 2008 - 2013. the most acute problems are remedied but some work remains a crucial cause of the most recent financial crisis was that banks around the world had taken on too much risk. this was possible for two reasons. firstly, the regulatory framework applying at the time did not sufficiently influence the banks ’ risk taking. secondly, the banks themselves evidently did not have the will or ability to manage their risks on their own. the answer was the basel iii agreement - a comprehensive package of reforms with the main purpose of strengthening the banks ’ capital base to ensure that they can manage losses in a better way and improve the banks ’ liquidity management. but even if basel iii dealt with the most acute shortcomings, work remains to be done to ensure that banks around the world are well capitalised. i intend to spend a little 1 time here talking about the reform work the basel committee is

currently involved in and why it is important that the new reforms are put into place. the global capital regulations will become more reliable and easier to compare between banks a basic idea behind the design of basel ii - the global capital regulations that were completed a few years before the financial crisis - was to create a stronger link between capital requirements and the banks ’ risks. this is largely attained by the banks having the opportunity to calculate their risk - weighted assets, and thus capital requirements, using internal models. when the financial crisis broke out, however, it became clear that these models often underestimated the risks in the banks ’ exposures. this meant that the capital requirement was lower than was appropriate. many actors, both regulators and market participants, have therefore expressed doubts as to how well these models actually reflect the risks. in 2013, the basel committee therefore published a number of reports analysing what capital requirements the banks ’ internal models generated. the reports show that there are major differences in the banks ’ capital requirements. they also show that these differences cannot be explained by the differences in the underlying risk in their assets, but are instead due to the way the banks measure risk. the fact that this is so not only makes it difficult to compare capital requirements between the banks, it also reduces the credibility of the international capital regulations. the committee ’ s current work therefore concerns to a large extent ensuring that the models used by the banks are reliable and reflect the risks in their operations in a correct manner. this work includes revising and to some extent limiting the banks ’ scope to use internal models to calculate their risk - weighted assets and thereby their capital requirements. for instance, the basel committee is planning to introduce floors for a number of the parameters the banks estimate themselves. the result of this is that we will see less difference in the banks ’ capital requirements for assets with similar risk profiles. let me make myself clear : the idea is not that we shall return to basel i. the banks will be able to continue using internal models in their risk management. what the committee's current work concerns is instead bringing order to the risk - based system to increase the credibility of the capital requirements the banks have and to make it easier to compare them. without this work, there is a risk of further erosion of confidence in the regulations. another important part of the committee's work involves modernising and developing standard methods so that they become more risk sensitive and thereby better adapted to banks with international operations. for many types of