The financial world is grappling with mounting challenges as geopolitical tensions and regulatory divisions threaten to fracture global banking rules. Nowhere is this more apparent than at the headquarters of the Bank for International Settlements (BIS) in Basel, where economists and regulators are wrestling with the implications of an increasingly fragmented global order.
The BIS, often dubbed the central bank for central banks, has long been at the heart of international financial coordination. Since its inception in the 1920s, its role has evolved significantly, despite early American reluctance to engage with it. The institution survived an attempt to abolish it at the 1944 Bretton Woods Conference, largely thanks to the intervention of John Maynard Keynes. Yet, the United States has never held the top post at the BIS, with the incoming General Manager, Pablo Hernández de Cos, being Spanish.
Growing Regulatory Tensions
The BIS houses several influential regulatory bodies, including the Basel Committee on Banking Supervision and the Financial Stability Board (FSB). These groups are currently focused on finalizing Basel 3.1, addressing risks posed by non-bank financial intermediaries such as hedge funds and private equity firms, and assessing the financial sector’s exposure to climate change.
However, achieving consensus has proven difficult. While global regulators strive for unified frameworks, the stance of the new US administration under President Donald Trump adds a layer of uncertainty. Trump’s economic approach remains firmly outside the traditional Basel framework, and early signs indicate a shift away from international regulatory cooperation.
In January, the Federal Reserve withdrew from the Network for Greening the Financial System, a coalition of central banks focused on climate-related financial risks. Similarly, Republican-led opposition dismantled several UN-backed financial alliances, including the Net-Zero Insurance Alliance, originally championed by former Bank of England Governor Mark Carney.
The Future of Basel 3.1
One of the most pressing concerns is the fate of the Basel Committee itself. The completion of Basel 3.1, often referred to as the “Basel Endgame,” became a contentious issue during the US election campaign. The Federal Reserve’s proposal to increase capital requirements for banks faced staunch Republican opposition, and with the departure of Vice Chair for Supervision Michael Barr, its implementation now appears uncertain.
Delays in the US have led regulators in the European Union and the United Kingdom to pause their own planned reforms, waiting to see how the situation unfolds. Should the US abandon Basel 3.1, the Basel Committee’s relevance could be called into question, creating a potential rift between American and European financial regulations. The consequences of such a divide could be profound, particularly if US banks operate under significantly lower capital requirements than their global counterparts.
Implications for the Global Financial System
Beyond banking regulations, the FSB also faces uncertainty. Historically met with skepticism by US policymakers, the board’s agenda remains at odds with Trump’s administration. Its recent push to impose leverage limits on hedge funds has drawn criticism, particularly from influential financial circles in Republican strongholds.
Cryptocurrency regulations further highlight the growing divergence between the US and global financial bodies. The European Central Bank (ECB) is pressing ahead with its plans for a digital euro, emphasizing the need for monetary sovereignty in an era of increasing geopolitical tensions. European policymakers remain acutely aware that the US has previously weaponized the dollar-based global payments system and could do so again.
However, US policymakers remain unenthusiastic about central bank digital currencies (CBDCs). Trump has explicitly prohibited the Federal Reserve from working on a digital dollar, arguing that it would interfere with private-sector innovations in stablecoins and digital assets. This divergence leaves global regulators uncertain about the future implications of a digital euro without a corresponding US equivalent.
A Fractured Financial Order?
The BIS is located in Basel largely due to its historical role as a meeting point for central bankers, owing to the layout of Europe’s railway system a century ago. Today, however, the institution finds itself at the crossroads of growing political fault lines. As regulatory coordination becomes more fragmented, the question looms: Can the BIS and its affiliated bodies maintain their relevance, or is the global financial system heading toward a fractured future?
What was once a hub for unified financial governance now risks devolving into a Tower of Babel, where competing priorities and political divisions make consensus increasingly elusive.
