For more than three decades, the Basel framework developed by the Bank for International Settlements (BIS) and the Basel Committee on Banking Supervision (BCBS) has provided the organising logic of international banking regulation. Each successive accord, Basel I, II and III, emerged in response to weaknesses exposed by financial crises, progressively strengthening the prudential architecture governing banks. Basel III, infact, represented a decisive inflection point. Beyond raising the level and quality of capital, introducing binding liquidity standards and constraining leverage, it institutionalised a macroprudential framework.
By conventional metrics, success of Basel III is unambiguous. Banks today are significantly more resilient to solvency and liquidity shocks than they were in 2008, as demonstrated during and in the aftermath of the Covid-19 pandemic. Although formally designed for internationally active banks, the Basel norms have been adopted across jurisdictions, including India, for broader domestic banking operations.
The challenge today, however, is that the financial architecture these standards were designed to safeguard has evolved profoundly. Financial intermediation has become increasingly diversified and dispersed, extending beyond traditional banks into market-based finance, investment funds, and hybrid entities. At the same time, finance has become dependent on technological set-ups that few regulators would have imagined a decade ago. Cloud infrastructure, digital platforms, data networks and algorithmic systems have introduced new forms of dependency and concentration and thus sit alongside banks as critical components of financial stability.
The banking turmoil of 2023 exposed the implications. Institutions that appeared well capitalised and comfortably liquid were nonetheless vulnerable. Their weaknesses lay in concentrated funding base, governance deficiencies, and rapid shifts in depositor behavior influenced by digitisation and social media. The lesson was difficult to ignore: meeting prudential requirements is not always the same as being resilient.
The regulatory question is therefore changing. It is no longer confined to whether banks hold sufficient capital and liquidity. It increasingly concerns whether the wider system within which they operate remains stable, intelligible and governable under stress. Much of the recent BIS-BCBS agenda reflects this shift. What is emerging is a transition from prudential sufficiency to system stewardship.
Regulatory Reorientation
The most visible sign of this transition is the BCBS moving from designing major new regulatory instruments towards implementation, evaluation and recalibration. Rather than continually expanding the rulebook, the Committee is increasingly focused on understanding how existing regulations perform in practice.
A central element of this effort is the simplification and consolidation of the Basel framework. The BCBS has undertaken systematic reviews to eliminate redundancies and improve coherence, reflecting a recognition that excessive complexity can itself become a source of weakness by obscuring risk signals and diluting supervisory clarity.
Alongside this, the Basel monitoring programme has evolved into a sophisticated analytical exercise. Questions such as variability in risk-weighted assets, the effects of output floors and the interaction between capital and liquidity standards are now examined as indicators of systemic consistency. Regulation is becoming more reflexive, concerned not only with prescribing rules but also with understanding their consequences.
An equally important development is the elevation of supervisory effectiveness. Risks increasingly emerge too quickly to be captured through static ratios alone. Supervisory processes are therefore expected to move beyond periodic verification towards continuous assessment. Supervision is being recast as a function that combines judgement, analysis and intelligence to identify vulnerabilities before they become crises.
Perimeter Expansion
Another significant change is the gradual expansion of the regulatory perimeter. While Basel standards remain formally focused on banks, supervisory and analytical attention increasingly extends beyond traditional institutional boundaries.
In collaboration with the Financial Stability Board, substantial work has been undertaken on non-bank financial intermediation and market-based finance, including private credit, digital assets, leverage within investment funds and liquidity mismatches. The objective is to understand how risks originating outside the banking sector can propagate through the financial system.
A similar logic underpins the growing attention to operational resilience and third-party risks as distinct from the Pillar I operational risk approach. Technological concentration in critical digital infrastructure and third-party services, including cloud services, data centres, software applications, algorithmic models, represents a new dimension of systemic risk. Financial stability is increasingly recognised as dependent not only on financial variables but also on the robustness of the supporting infrastructure. Regulatory attention is therefore turning towards artificial intelligence, cybersecurity, digital platforms, cloud service providers and other critical technological dependencies.
The cumulative effect of these shifts is the emergence of a new regulatory logic that moves beyond the traditional emphasis on the ex-ante calibration of quantitative requirements toward a more dynamic, system-oriented and judgement-based framework. Increasing reliance on stress testing, scenario analysis, forward-looking direction reflects a shift toward anticipating risks, understanding interconnections and feedback loops, and exercising supervisory judgement to navigate growing complexity and uncertainty.
These developments do not constitute a new Basel accord. Rather, they represent a shift in the fundamental regulatory philosophy. The focus is moving from ensuring that institutions satisfy prescribed standards towards understanding how the financial system behaves under conditions of stress, complexity and change. The emphasis is increasingly on resilience at the system level rather than institutional compliance alone.
For India, the implications are significant. A strong banking sector, a large and diverse non-bank ecosystem and a rapidly digitising financial landscape create conditions in which traditional regulatory approaches may prove insufficient.
The Reserve Bank of India has already introduced several measures that resonate with the evolving BIS-BCBS direction. However, the broader transition towards system stewardship remains incomplete.
The next article in this series will examine how India's regulatory framework is responding to this shift and what further steps may be required to move from alignment to leadership.
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