A senior international banking regulator has warned that the European Union could face serious financial stability risks if it moves too far in weakening or abandoning a key element of the Basel framework, highlighting growing tensions between the bloc’s push for simpler regulation and the need to preserve strong safeguards for banks.
Pablo Hernández de Cos, general manager of the Bank for International Settlements and a former chair of the Basel Committee on Banking Supervision, has been a prominent advocate of maintaining the core principles of the post-financial-crisis regulatory framework. He chaired the Basel Committee from 2019 to 2024 before becoming head of the BIS in July 2025.
The debate comes as European policymakers increasingly examine whether banking regulations have become too complicated and costly. EU authorities and industry groups have been calling for simplification, arguing that layers of capital, reporting and supervisory requirements can make European banks less competitive compared with financial institutions in other major markets.
But Hernández de Cos has drawn an important distinction between simplifying regulation and reducing prudential safeguards. In recent speeches, he has argued that the financial system can benefit from a clearer and less complicated rulebook without sacrificing the resilience achieved since the global financial crisis.
The issue is particularly important because the Basel III reforms were designed to prevent banks from understating the risks on their balance sheets. One of the framework’s central mechanisms is the so-called output floor, which limits how far banks using internal risk models can reduce their risk-weighted assets compared with calculations based on standardized approaches.
Under the Basel framework, the output floor is ultimately set at 72.5% of risk-weighted assets calculated under the standardized approach. Its purpose is to make capital ratios more comparable between banks and prevent differences in internal models from producing excessively large differences in reported risk levels.
Hernández de Cos has previously described the output floor as a crucial part of the Basel reforms. In a 2021 interview, he said full and consistent implementation of Basel III should include the output floor, arguing that it was important for restoring confidence in banks’ risk-weight calculations and maintaining a global level playing field.
The argument has gained new relevance as Europe considers changes to its financial rulebook. EU policymakers are under pressure to improve the competitiveness of European banks, particularly as regulatory approaches in the United States and other major jurisdictions continue to evolve.
The European Union has already adjusted the timetable for some Basel requirements. The market-risk component known as the Fundamental Review of the Trading Book, or FRTB, has been postponed, with implementation pushed further out to give regulators time to assess developments in other major jurisdictions. At the same time, the broader Basel III framework has been incorporated into EU law through the Capital Requirements Regulation and related legislation.
That creates a difficult policy balance. European banks argue that they should not be forced to carry significantly higher regulatory costs than competitors elsewhere. Regulators, however, are concerned that using competitiveness as a reason to weaken capital standards could eventually undermine financial stability.
The debate is also occurring against a backdrop of lessons from the banking turmoil of 2023. Hernández de Cos has emphasized that the failures and near-failures of that period showed that meeting formal capital requirements does not automatically eliminate banking risks. Poor governance, weak risk management and unsustainable business models were among the underlying problems identified after the turmoil.
That experience strengthens the argument for keeping robust minimum standards even while regulators look for ways to make supervision more efficient. Hernández de Cos has said that excessive regulatory complexity can itself create problems by making rules harder for banks and supervisors to understand and by weakening transparency.
The European debate therefore increasingly centers on what should be simplified and what should remain untouched. There is growing support for reducing unnecessary reporting requirements, streamlining supervisory procedures and creating more proportional rules for smaller banks. Recent European proposals have also considered simpler frameworks for smaller and less complex institutions rather than applying the same regulatory burden to every bank.
However, critics of aggressive deregulation warn that smaller banks can also create systemic problems when many institutions are exposed to the same economic shock. A lighter framework must therefore be designed carefully to avoid encouraging banks to take on excessive risks simply because regulatory requirements are lower.
The wider concern is that regulatory fragmentation could also damage the international banking system. Basel standards were created to establish a common framework across jurisdictions, helping ensure that banks compete under broadly comparable prudential requirements. If major economies begin selectively abandoning key elements, banks could face increasingly different capital rules depending on where they operate.
For Europe, the stakes are particularly high. The bloc wants stronger economic growth, deeper capital markets and a more competitive banking sector, but regulators also need to maintain confidence among depositors, investors and international markets.
The challenge, therefore, may not be whether Europe should simplify its banking rules, but how it can do so without weakening the foundations created after the 2008 financial crisis.
Hernández de Cos’s position reflects that broader concern: financial regulation can and should evolve, but reforms should be tested against their impact on resilience. The Basel framework itself is not necessarily immune from improvement. Yet reopening or weakening its core safeguards before there is confidence in the alternatives could create risks that only become visible during the next financial shock.
For European policymakers, the message is clear. Competitiveness and simplification may be legitimate goals, but they cannot come at the expense of the capital standards designed to prevent another major banking crisis.
As the EU considers the future of its banking rulebook, the debate will ultimately revolve around a fundamental question: can Europe make its banks more competitive while preserving the financial stability that the Basel reforms were designed to protect? The answer could shape the resilience of the European banking system for years to come.
