Banking Regulation in the United Kingdom, France and the European Union, 2007–2026
Basel, Successive Crises and the Limits of Prudential Law
1. Introduction
This note examines banking regulation between 2007 and 2026 in three political units — the United Kingdom, France and the European Union. The analysis is deliberately confined to the regulation of conventional banking institutions: banks and credit institutions that possess legal personality, operate through recognised corporate structures, are authorised by the competent supervisory authorities, and conduct banking business within the established prudential framework of domestic, European Union and international law. The focus is therefore on traditional deposit-taking, commercial, retail, investment and universal banks subject to the Basel Accords, the European Banking Union, the European Central Bank (ECB), the European Banking Authority (EBA), the Bank of England, the Prudential Regulation Authority (PRA), the Financial Conduct Authority (FCA) and the corresponding national authorities.
Save where strictly necessary for context, the note does not address the increasingly complex questions raised by technologically driven finance[1]. The decision to begin with conventional banks is both practical and analytical: the modern regulatory architecture built after the Global Financial Crisis — capital adequacy, liquidity regulation, supervisory review, resolution regimes, deposit protection and sovereign-risk management — was designed primarily for institutions that physically exist as licensed banking entities within identifiable legal and supervisory structures. A clear understanding of those institutions provides the foundation for any later examination of newer forms of intermediation. The regulation is considered partly from a historical perspective, organised around five macroeconomic events: the United States sub-prime crisis (2007); the collapse of Northern Rock (2007–2008); the Greek sovereign-debt crisis (2009–2015); the COVID-19 pandemic (2020–2021); and the geopolitical shocks associated with the war in Ukraine (2022) and continuing geopolitical tensions involving Iran. Degrees of similarity and difference emerge concerning the regulatory rules and their interpretation by regulators and courts. A recurring observation is that the difficulties in the Anglo-American model originated principally in liquidity, whereas the essential European problem has been sovereign debt; the architecture adopted has, for the present, prevented both types of difficulty from recurring. The most recent crises — pandemic and geopolitical conflict — produce potential problems for which the Basel rules were never conceived, and only the course of events will determine whether they can be adapted.
An analytical framework
Four recurring themes underpin the analysis that follows. They are introduced here and thereafter referred to by name rather than re-explained:
1. Liquidity versus solvency risk — the recurring lesson that an institution may be adequately capitalised yet fail for want of funding.
2. Sovereign versus banking risk — the structural linkage (the “doom loop”) between bank balance sheets and the creditworthiness of states.
3. Regulation as a response to previous crises — the tendency of each reform to correct the last crisis while leaving fresh vulnerabilities exposed.
4. The increasing importance of external systemic shocks — pandemics and geopolitical conflict, which originate outside the financial system and lie beyond the Basel perimeter.
2. The Basel Accords: Origins and Development
The Basel Accords constitute the most influential body of international banking standards developed since the late twentieth century. Their purpose has been to strengthen the resilience of banks, reduce the probability of systemic crises, and promote regulatory convergence across jurisdictions. Although they do not possess direct legal force, they are implemented through domestic legislation and have become the foundation of modern prudential supervision[2]. The process originated in the instability following the collapse of the Bretton Woods system and the failure of the German bank Herstatt in 1974, which led the governors of the G10 central banks to establish the Basel Committee on Banking Supervision (BCBS) under the auspices of the Bank for International Settlements. A defining feature of the process is its reliance on what scholars describe as “soft law”: the standards are not binding treaties but become effective through incorporation into domestic systems, and compliance has nonetheless been remarkably widespread because regulators and markets treat them as the benchmark of prudent regulation.
Basel I (1988)
The first Capital Accord, adopted in July 1988, established the first internationally harmonised system of minimum capital requirements, obliging internationally active banks to hold capital equal to at least 8 per cent of risk-weighted assets. Its twin objectives were to strengthen safety and soundness and to reduce competitive inequalities between banks in different jurisdictions[3]. The Accord rapidly became the global benchmark, but it attracted criticism for its crude approach to risk: broad categories of assets received identical weights despite very different underlying risk, creating incentives for regulatory arbitrage. A significant amendment in 1996 introduced explicit capital requirements for market risk, the first major expansion of the framework beyond credit risk.
Basel II (2004)
Basel II, adopted in June 2004, sought to remedy these weaknesses through a more risk-sensitive framework organised around three pillars: minimum capital requirements, supervisory review, and market discipline through enhanced disclosure. Its intellectual foundation lay in modern financial economics: banks were encouraged to develop internal ratings-based models and advanced modelling techniques, subject to supervisory approval, in the expectation that greater risk sensitivity would improve both efficiency and stability. The consolidated version was published in 2006 and became the principal reference for national implementation. The Global Financial Crisis of 2007–2009 exposed the central defect of this approach. Institutions that appeared adequately capitalised under Basel II frequently experienced severe distress, and subsequent scholarship has argued that excessive reliance on internal models allowed banks to underestimate risk[4]. The crisis also revealed that capital adequacy alone could not guarantee stability: excessive leverage, inadequate liquidity buffers and interconnectedness created systemic risks that Basel II had not addressed (theme 1). These failures provided the impetus for Basel III.
Basel III (2010–2017) and its finalisation
Basel III, agreed between 2010 and 2017, was a multi-pillar reform addressing several distinct weaknesses exposed by the crisis, of which liquidity was only one. It substantially increased both the quantity and quality of regulatory capital, with particular emphasis on Common Equity Tier 1 as the highest-quality, loss-absorbing capital. It introduced a capital-conservation buffer and a counter-cyclical buffer designed to temper procyclicality, a non-risk-based leverage ratio designed as a backstop against excessive balance-sheet expansion, and capital surcharges for global and domestic systemically important banks (SIFIs) intended to address the systemic interconnectedness that had transmitted the 2008 crisis so rapidly across institutions and borders. Alongside these measures, Basel III also recognised liquidity risk as a central regulatory concern for the first time: the Liquidity Coverage Ratio (LCR) requires banks to hold sufficient high-quality liquid assets to survive a period of severe stress, while the Net Stable Funding Ratio (NSFR) promotes longer-term funding stability and reduces dependence on short-term wholesale markets. Together these measures — capital, leverage, procyclicality, interconnectedness and liquidity — marked a decisive shift towards macro-prudential regulation of the system as a whole[5].
The final package agreed in December 2017 (the “Basel III Endgame”, also “Basel 3.1” or “Basel IV”) sought to reduce excessive variability in risk-weighted-asset calculations and improve comparability. Its most important reform was an output floor limiting the extent to which internal models may reduce capital relative to standardised approaches. Whereas Basel II had placed considerable confidence in banks’ own models, the finalisation reflected a renewed emphasis on standardisation and supervisory judgment — evidence that regulators had become more cautious about the reliability of sophisticated quantitative models after the crisis (theme 3). The contemporary Basel Framework now encompasses standards on capital, leverage, liquidity, operational and market risk, disclosure, large exposures, securitisation and interest-rate risk in the banking book, and remains the central pillar of international prudential regulation.
Three features of the framework deserve emphasis before the crises are examined. First, despite its apparently voluntary character, compliance has been remarkably widespread, because market participants, international institutions and national regulators treat the standards as the benchmark of prudent regulation; the diffusion of Basel norms well beyond the Committee’s original membership illustrates the practical effectiveness of international soft-law mechanisms[6]. Second, the trajectory from Basel I to the finalisation reforms is best understood as a cycle in which each crisis exposes weaknesses in the previous framework and prompts a further round of reform — Basel III correcting Basel II as Basel II had sought to correct Basel I (theme 3). Third, an open question runs through the whole framework: whether such reforms can ever eliminate systemic crises, or whether they tend only to resolve the causes of the last crisis while leaving institutions exposed to new forms of risk — a question the successive crises examined below help to answer.
3. Implementation in the United Kingdom, the EU and France
Because the Accords are not treaties and have no direct legal force, the legal history of Basel implementation is best understood as successive waves of legislative and regulatory transposition designed to render the standards binding within domestic systems. Within the European Union, Basel I was implemented principally through the Solvency Ratio Directive, requiring credit institutions to maintain minimum own funds relative to risk-weighted exposures. Basel II was transposed through the Capital Requirements Directives (CRD I, principally Directives 2006/48/EC and 2006/49/EC), which introduced the three-pillar structure and permitted sophisticated institutions to use internal ratings-based models. Basel III was implemented through the Capital Requirements Regulation (Regulation (EU) No 575/2013, the CRR) and Directive 2013/36/EU (CRD IV), together the foundation of the Banking Union’s prudential architecture; these were extended by Regulation (EU) 2019/876 (CRR II) and Directive (EU) 2019/878 (CRD V), introducing revised leverage and net-stable-funding requirements and enhanced supervisory powers. The finalisation reforms are implemented through Regulation (EU) 2024/1623 (CRR III) and Directive (EU) 2024/1619 (CRD VI), which introduce the output floor, revise the credit, market and operational-risk methodologies, strengthen supervision of third-country branches and integrate ESG-related risks[7].
In the United Kingdom, Basel I was implemented under the Banking Act regime through supervisory rules issued by the Bank of England; Basel II through rules of the Financial Services Authority under the Financial Services and Markets Act 2000 (FSMA); and Basel III initially through the directly applicable CRR together with the Financial Services Act 2012, which established the PRA within the Bank of England and restructured supervision following the failures of the crisis. After Brexit the United Kingdom did not reproduce the EU banking package: finalisation is implemented through the PRA’s Basel 3.1 framework and amendments to the PRA Rulebook, completed in policy statement PS1/26 (January 2026), which preserves alignment with Basel standards while maintaining regulatory autonomy. In France, each phase has been integrated into the Code monétaire et financier. French institutions were brought within the harmonised European prudential regime while remaining subject to national administrative supervision by the Autorité de contrôle prudentiel et de résolution (ACPR) and, for significant institutions such as BNP Paribas, Société Générale and Crédit Agricole, by the Single Supervisory Mechanism (SSM) of the ECB. Directly applicable EU regulations apply alongside transposed directives within a multi-layered structure. Overall, the legislative history illustrates theme 3: non-binding international standards hardening, crisis by crisis, into binding law through repeated incorporation into EU, French and UK instruments.
Two structural points emerge from this comparison. The first is that the three systems implement an identical set of international standards through markedly different legal instruments — directly applicable EU regulations and transposed directives in France, a domestic rulebook administered by an operationally independent regulator in the United Kingdom — with the consequence that substantive convergence coexists with institutional divergence. The second is that Brexit has, for the first time since Basel I, introduced the possibility of deliberate divergence: although PS1/26 preserves substantial alignment, the PRA is no longer bound to track the EU package, and the two systems may gradually follow distinct trajectories, a theme returned to in the discussion of interpretation in the companion article on interpretation and judicial review.
4. The Crises: A Comparative Overview
The successive Basel reforms and their transposition were closely connected to a series of macroeconomic shocks that exposed weaknesses in the existing framework. Crises revealed deficiencies; reforms sought to prevent their recurrence. Rather than devoting a long chapter to each episode, the five crises are summarised comparatively below and then discussed in turn, with cross-references to the four themes. The sub-prime and Northern Rock episodes are treated together because they are two faces of the same liquidity event. Before turning to the episodes individually, it is worth making explicit the causal relationship that organises the analysis. Banking legislation and macroeconomic shocks have evolved in a particular sequence: crises reveal deficiencies in the prevailing framework, and regulatory reforms then seek to prevent the recurrence of similar failures[8]. The purpose of what follows is therefore not merely to describe the crises but to assess how each tested the adequacy of the prevailing Basel-based framework in the United Kingdom, the European Union and France, and how subsequent adjustments sought to restore or reinforce stability. The episodes are taken in chronological order, since each conditioned the environment in which the next unfolded.
Crisis Main risk Basel weakness revealed Regulatory response
Sub-prime (2007–08) Credit / liquidity Basel II reliance on internal models Basel III
Northern Rock (2007–08) Liquidity / funding No funding-stability oversight LCR / NSFR
Greece (2009–15) Sovereign debt Zero risk-weighting of sovereigns Banking Union
COVID-19 (2020–21) External shock Buffer usability in stress Counter-cyclical measures
Ukraine / Iran (2022–26) Geopolitical / operational Outside Basel scope Operational resilience
4.1 The sub-prime crisis
The crisis originated in the United States between 2006 and 2007, when large numbers of high-risk (“sub-prime”) mortgage borrowers began to default. These mortgages had been bundled into complex securities — mortgage-backed securities and collateralised debt obligations — and sold throughout the global financial system. When US house prices fell and defaults rose, the value of these securities collapsed, and the bankruptcy of Lehman Brothers transformed a housing-market problem into a global banking crisis[9]. Its effects were transmitted rapidly to Europe, where many banks had invested heavily in US mortgage securities and relied on short-term wholesale funding; the freezing of interbank markets forced central banks, including the ECB, to provide unprecedented emergency liquidity. The crisis exposed serious weaknesses in the Basel II framework, which had focused heavily on internal models and underestimated the systemic risks of securitisation, interconnectedness and liquidity shortages. Regulators had assumed that diversification through securitisation reduced risk; in reality it spread risk throughout the system. The most significant conclusion for present purposes is that risks generated in a lightly regulated segment of the US mortgage market were transmitted globally through securitisation and interconnected banking networks, ultimately transforming a private banking crisis into a sovereign-debt crisis in several European states (theme 2) and prompting the most significant reconfiguration of banking regulation since the Accords began (theme 3).
The European transmission deserves emphasis because it foreshadows the Greek crisis. Governments across Europe rescued failing banks through guarantees, recapitalisations and asset-purchase schemes, which substantially increased public debt; in Greece, Ireland, Portugal and Spain, concerns about government solvency followed concerns about bank solvency. The resulting feedback between banks and sovereigns — the “doom loop” — became a defining feature of the European crisis from 2010 to 2012 and connects the liquidity-driven Anglo-American episode of 2007–2008 to the sovereign-driven European episode that followed (themes 1 and 2). It also explains why the regulatory response bifurcated: the United Kingdom and the United States concentrated on liquidity, leverage and capital, while the European Union was driven towards Banking Union and the management of the bank–sovereign nexus.
4.2 Northern Rock: the canonical liquidity failure
The collapse of Northern Rock in September 2007 is one of the most significant episodes in modern British financial history — not merely because it produced the first bank run in the United Kingdom since the nineteenth century, but because it exposed profound weaknesses in the intellectual foundations of the regulation that had developed over the preceding three decades. The institution’s failure did not originate primarily in poor-quality assets comparable to those of American sub-prime lenders; it revealed the vulnerability of a banking model increasingly dependent on wholesale funding, securitisation and continuous market liquidity.
Northern Rock began as a traditional building society in which mortgage lending was funded by retail deposits — a structure possessing inherent stability because assets and liabilities were broadly aligned. Following demutualisation in 1997 it became a listed bank and pursued an aggressive growth strategy, shifting progressively from retail deposits towards wholesale funding and securitisation through vehicles such as Granite. This enabled rapid expansion without a corresponding deposit base, but created a significant maturity mismatch between long-term assets and short-term liabilities; the bank’s survival depended on its ability to refinance repeatedly in wholesale markets. The distinction between solvency and liquidity is central to understanding the episode (theme 1). Traditional theory assumes that banks fail because they become insolvent through deteriorating asset quality. Northern Rock demonstrated that a bank may remain technically solvent while becoming incapable of meeting its obligations because funding sources disappear: its mortgage book remained substantially healthier than those of many American lenders, yet its dependence on continuous refinancing rendered it fatally vulnerable when wholesale markets contracted in the summer of 2007. The initial run occurred among institutional counterparties; the queues of retail depositors outside branches — the defining public image of the crisis — followed only after news emerged that the bank had requested emergency assistance from the Bank of England[10]. Northern Rock thus provided one of the earliest demonstrations that financial crises in market-based banking systems differ fundamentally from the classical panics described by nineteenth-century economists.
The episode exposed serious deficiencies in Basel II. Because prime residential mortgages attracted favourable risk weights, Northern Rock appeared well capitalised and compliant with prudential requirements — yet it failed spectacularly. The paradox demonstrated that capital adequacy alone was insufficient and that liquidity risk constituted an independent source of vulnerability capable of destroying an otherwise solvent institution. More broadly, the crisis revealed the dangers of a supervisory philosophy that relied on quantitative models and formal compliance while paying insufficient attention to the economic substance of business models: Northern Rock’s extraordinary growth and funding dependence had been visible long before 2007 but attracted limited concern because the institution appeared compliant. The crisis also revealed weaknesses in the broader financial safety net. Responsibility for stability was divided among the Treasury, the FSA and the Bank of England under the so-called Tripartite Arrangement, which produced uncertainty over institutional responsibilities; subsequent parliamentary investigation concluded that communication failures and inadequate supervision had aggravated the crisis. Deficient deposit-insurance arrangements compounded the problem, since depositors were uncertain about the extent and speed of compensation. Finally, the episode discredited the prevailing view of securitisation as a benign mechanism for dispersing risk: when confidence in structured products evaporated, securitisation transmitted instability rather than dispersing it.
The reforms that followed altered international regulation fundamentally. Basel III incorporated the LCR and NSFR specifically to address the funding vulnerabilities Northern Rock had exposed, acknowledging that prudential regulation must address solvency and funding resilience simultaneously. Domestically, the FSA was abolished, prudential supervision returned to the Bank of England through the PRA, and the Financial Policy Committee was created to monitor systemic risk. Northern Rock therefore occupies a notable position between the American sub-prime crisis and the broader global crisis: it showed how disturbances in one market segment could spread through liquidity channels to institutions with limited direct exposure, and it remains the clearest illustration of theme 1.
4.3 The Greek sovereign-debt crisis
The Greek crisis emerged in October 2009, when the newly elected government revised the estimated 2009 fiscal deficit from around 6 per cent of GDP to more than 12 per cent, with later revisions higher still. Market confidence collapsed, sovereign spreads widened rapidly, and by spring 2010 Greece had lost access to private capital markets and entered its first EU–IMF assistance programme. It is widely regarded as the first systemic sovereign-debt crisis of the euro area, exposing the institutional fragility of a monetary union without fiscal union[11].
Its banking significance lies in theme 2. The Basel framework was never designed to address sovereign solvency; its object is bank capital adequacy and liquidity. Before the crisis, euro-area banks held large quantities of domestic sovereign debt, often under regimes assigning such exposures a zero or near-zero risk weight. This treatment encouraged the accumulation of government bonds on bank balance sheets and reinforced the structural link between sovereign creditworthiness and banking stability — the “bank–sovereign loop”[12]. When Greek spreads widened, the fall in bond values fed directly into bank balance sheets, and the crisis spread from sovereign to banking balance sheets in a self-reinforcing feedback loop. Basel regulation did not prevent this because it treated advanced-economy sovereign exposures as essentially risk-free; in effect it institutionalised an assumption inconsistent with the realities of sovereign-debt dynamics in a monetary union under stress. This zero risk-weighting should not, however, be overstated as a cause of the crisis: the absence of a fiscal union capable of backstopping distressed sovereigns, and the architecture of the ECB's own monetary framework — which lacked, at the outset, the tools later developed to stabilise sovereign spreads — were at least as important in transmitting sovereign stress into the banking sector, and were, on many accounts, more fundamental than the Basel treatment of sovereign exposures.
The earlier crises shaped the environment in which the Greek crisis unfolded. The sub-prime crisis had weakened global banking systems and reduced wholesale-market liquidity, and Northern Rock had revealed the fragility of funding models dependent on short-term wholesale finance. European banks therefore entered the sovereign-debt crisis with weakened balance sheets, reduced risk tolerance and greater dependence on short-term funding, which amplified the euro area’s vulnerability when Greek data was revised. Basel could stabilise individual banks under stress, but it could not remedy the underlying design flaw — the absence of any mechanism to mutualise sovereign risk. The constitutional response (the EFSF, the ESM and the no-bail-out clause in Article 125 TFEU) and the associated litigation are examined, so far as they bear on banks, in Section 7 below and in a companion article.
At the institutional level, the defining constraint was Article 125 TFEU, which prohibits the Union or a Member State from assuming the commitments of another. This “no bail-out clause” meant that any collective debt assumption had to be constructed indirectly: the European Financial Stability Facility and later the European Stability Mechanism were designed as intergovernmental instruments providing assistance under strict conditionality while formally avoiding the direct assumption of another state’s debt. The arrangement generated a persistent tension — financial stability in a monetary union requires credible mechanisms for risk-sharing and fiscal backstopping, yet Article 125 enshrines individual responsibility for sovereign debt — which remains unresolved and continues to represent a profound structural weakness of the euro area. For banking regulation, the practical significance is that the value of sovereign exposures held by banks depends in part on the credibility of mechanisms that are themselves legally and constitutionally contested.
4.4 The COVID-19 pandemic: an external shock and a real-time stress test
Unlike the sub-prime crisis, the pandemic did not originate in financial markets or in weaknesses in bank balance sheets. It was an exogenous public-health emergency (theme 4) that functioned as a real-time stress test of the post-crisis reforms. In contrast to 2008 — which originated within the banking sector through leverage, securitisation and credit-risk mispricing — the COVID-19 shock arrived from outside and was transmitted through liquidity constraints, credit uncertainty and macroeconomic collapse. The consensus in the literature is that Basel III materially improved resilience. Banks entered the pandemic with substantially higher capital and liquidity buffers than in 2008, particularly in Common Equity Tier 1 and the LCR, which allowed them to absorb losses without immediate balance-sheet contraction[13]. Crucially, regulators in many jurisdictions allowed banks to draw down capital-conservation and counter-cyclical buffers, preventing forced deleveraging and avoiding a credit crunch in the early phase. Liquidity regulation also stabilised the system: the LCR and NSFR had reduced dependence on short-term wholesale funding and increased holdings of high-quality liquid assets.
The pandemic nonetheless exposed continuing limitations. First, liquidity stress remained a transmission channel: even well-capitalised banks faced funding pressures during the March 2020 dislocation, particularly in dollar funding markets, requiring extensive central-bank intervention — evidence that liquidity rules reduce but do not eliminate systemic liquidity risk. Second, the internal-model approaches inherited from Basel II temporarily lost predictive power, because the historical default data and correlation structures on which they rely were distorted by unprecedented government interventions, moratoria and fiscal support. Third, the crisis intensified structural profitability pressures: persistently low rates and increased loan-loss provisioning compressed net interest margins, a problem Basel III does not address. Fourth, although less pro-cyclical than Basel II, the framework did not eliminate pro-cyclicality, since banks tightened lending standards early in the pandemic despite strong capital positions. Two refinements followed. The first is explicit recognition that buffers must be usable in a downturn — a shift from precautionary accumulation to dynamic deployment of capital during stress. The second is renewed emphasis on liquidity risk as a systemic concern equal to solvency, leading to system-wide liquidity stress-testing and closer central-bank–supervisory coordination. The overall verdict is that Basel III transformed banks from amplifiers of crises into absorbers of macroeconomic shocks, but that it remains incomplete: its principal limitation is the continued dependence on central banks to stabilise liquidity markets, a point developed in Section 6.
The comparative dimension is instructive. Banking systems in the United Kingdom, the European Union and France generally proved markedly more resilient during the pandemic than during the global financial crisis, and no bank failures comparable to those of 2008 occurred. This contrast is among the strongest available evidence that the post-crisis architecture achieved its central objective. Yet the same comparison exposes the boundary of that achievement: resilience was purchased not only by the buffers banks carried into the crisis but by fiscal support of a scale unseen in peacetime and by extraordinary monetary intervention. A significant part of that fiscal support took the form of state guarantees on new lending — schemes such as the Bounce Back Loans in the United Kingdom and the *prêts garantis par l'État* in France — under which governments, rather than banks, absorbed the bulk of the credit risk on a large proportion of new lending extended during the crisis. Much of the continued flow of credit during 2020 therefore reflected sovereign risk-bearing rather than the resilience of bank balance sheets as such, and the low realised loan losses of the period should be read with that qualification in mind. The pandemic therefore demonstrated both propositions at once — that prudential regulation can prevent banks from amplifying an external shock, and that it cannot, by itself, secure economic stability, which depended on public expenditure and central-bank action lying entirely outside the Basel perimeter (theme 4).
4.5 Ukraine and Iran — cross-reference
Because the geopolitical episodes are prospective rather than retrospective in character, they are treated separately, and with appropriate caution, in Section 8.
5. French Banking Regulation and Supervisory Practice
The title of this study promises a comparative treatment, and France merits analysis as an independent subject rather than merely as an example of EU implementation. French prudential supervision is exercised by the ACPR, an authority attached to the Banque de France, alongside the Autorité des marchés financiers (AMF) for conduct and markets. Since the creation of the Banking Union, the significant French groups are supervised directly by the ECB within the SSM, while the ACPR retains supervision of less significant institutions and a central role in resolution. The Banque de France contributes through its macro-prudential and financial-stability functions[14]. The French supervisory style is comparatively rule-based and law-centred. As the companion article on interpretation explains, every supervisory obligation must ultimately be traceable to a legislative or regulatory text, principally in the Code monétaire et financier, in contrast to the open-textured, principle-based approach of the United Kingdom. French administrative law is not, however, devoid of principle: the Conseil d’État applies general principles — proportionality, sécurité juridique, equality and the rights of the defence — but these principles govern public authorities rather than operating as substantive duties addressed directly to firms[15].
The conduct of the major French groups illustrates how prudential and supervisory questions arise in practice. The sanctions history of BNP Paribas — notably the 2014 settlement with United States authorities over breaches of sanctions regimes — demonstrates the operational, legal and reputational dimension of compliance risk that Basel addresses only indirectly. The Kerviel affair at Société Générale (2008), in which unauthorised trading produced very large losses, exposed deficiencies in internal control and operational-risk management that the post-crisis framework sought to address. The more domestically oriented model of Crédit Agricole, by contrast, shows why funding-market exposure varies markedly across institutions — a point developed in the geopolitical analysis in Section 8, where BNP Paribas’s global trading profile makes it more sensitive to dollar-liquidity stress than the deposit-funded Crédit Agricole. French banks weathered the pandemic without solvency distress, supported by the same usable buffers discussed above and by the ECB’s assessment that euro-area banks remained well capitalised under Basel III.
The institutional architecture also reflects the French administrative-law tradition. The ACPR is not a free-standing agency on the British model but an authority closely integrated with the Banque de France, which contributes the macro-prudential and lender-of-last-resort functions; its sanctioning decisions are subject to review by the Conseil d’État, and the proportionality of any sanction or supervisory measure may be examined with the intensity described in the companion article on judicial review. This combination — technical supervisory discretion exercised within tightly drawn legality constraints and subject to relatively searching administrative-law review — distinguishes the French model from both the discretion-oriented British approach and the harmonised, regulation-driven EU framework within which France simultaneously operates. The interaction between the ACPR and the SSM is therefore layered: for significant institutions the ECB is the direct supervisor, but national administrative law continues to shape the legal environment in which French banks and their supervisor operate, and the Conseil d’État retains jurisdiction over national measures. A richer comparative dimension thus emerges once France is treated as an independent subject rather than as a mere site of EU implementation: its rules-based culture, its intensive judicial review and its universal-banking model together produce a regulatory experience materially different from that of the United Kingdom, even where the underlying Basel standards are identical.
United Kingdom and France compared
Issue United Kingdom France
Principal regulators PRA / FCA ACPR / AMF
Legal tradition Common law Civil law
Supervisory style Principles-based Rules-based
Judicial review More deferential More intensive
6. A Critical Assessment of Basel III
It would be incomplete, and unbalanced, to treat Basel III as an unqualified success. A fair evaluation must weigh the following criticisms against its evident achievements. Reduced lending capacity. Critics argue that higher capital requirements raise banks’ funding costs and may, at the margin, cause lending to contract. The concern is recurrent in industry representations, though the empirical magnitude is contested and many studies find the long-run output cost modest relative to the stability benefits. The tension between resilience and credit provision nonetheless remains a genuine policy trade-off. Regulatory complexity and cost. Basel III is vastly more complex than Basel I. This complexity generates substantial compliance costs for firms and supervisory burdens for regulators, and reduces transparency for outsiders seeking to compare institutions — an irony given that comparability was a principal objective of the finalisation reforms. Migration of risk to shadow banking. Tighter rules applied to banks may simply displace risk to entities outside the prudential perimeter — hedge funds, private-credit funds and other non-bank lenders. To the extent that systemically relevant intermediation migrates beyond the reach of bank regulation, the apparent stability of the regulated sector may overstate the resilience of the system as a whole.
Residual model risk. Even after the output floor, the framework continues to rely in part on internal models, assumptions and stress scenarios. The 2008 crisis and the COVID-19 episode both demonstrated that such models can lose predictive power precisely when they are most needed, which qualifies confidence in risk-sensitive capital calculations. Continued dependence on central banks. Perhaps the most important limitation is that liquidity ultimately still requires central banks. COVID-19 and the regional-bank stresses of 2023 suggest that, whatever the LCR and NSFR achieve, central banks remain the ultimate guarantors of liquidity — a reminder that prudential regulation operates within, and depends upon, a wider architecture of monetary support (theme 1). These criticisms do not negate the framework’s success against traditional balance-sheet risk; they qualify it, and they frame the central thesis advanced in the conclusion.
7. Sovereign Risk and the Basel Treatment of Government Bonds
The Greek crisis generated a rich constitutional debate — Pringle, Gauweiler, Weiss and the conflict between Karlsruhe and Luxembourg — but the connection of that debate to banking regulation is, on examination, indirect. The detailed constitutional analysis is therefore set out in a companion article; here it suffices to state why it matters for banks. The constitutional uncertainty surrounding sovereign-support mechanisms directly affects bank balance-sheet risk and the valuation of sovereign bonds: so long as Article 125 TFEU formally prohibits debt mutualisation, the credibility of any backstop — and therefore the riskiness of the government paper that fills banks’ liquidity buffers — remains contingent on a legal and political resolution that has not occurred.
The prudentially significant questions are accordingly three. First, the zero risk-weighting of EU sovereign exposures continues to treat as risk-free assets that demonstrably carry market and, in extremis, credit risk; this is a regulatory assumption rather than an economic fact, and it shaped the build-up to the Greek crisis. Second, sovereign concentration risk — the heavy holding of domestic government debt by domestic banks — sustains the doom loop (theme 2) notwithstanding the creation of the Banking Union, the SSM and the Single Resolution Mechanism. Proposals to introduce concentration charges or positive risk weights on sovereign exposures have been repeatedly discussed but not adopted. Third, any reform of the Basel treatment of government bonds collides directly with the unresolved constitutional architecture of the euro area, because re-pricing sovereign risk would have immediate fiscal and political consequences for Member States whose banks hold their debt. These are banking-regulation problems that prudential rules alone cannot solve, and they explain why the Eurozone’s principal banking objective has become the completion of Banking Union rather than the recalibration of capital ratios.
It is worth noting that the Basel Committee and the European authorities have repeatedly examined whether the prudential treatment of sovereign exposures should be reformed — through positive risk weights, concentration charges, or limits on the proportion of a bank’s capital that may be exposed to a single sovereign. Each proposal has foundered on the same difficulty: re-pricing sovereign risk would raise the cost of government borrowing, could trigger disorderly portfolio adjustment, and would expose the very bank–sovereign linkage it sought to weaken. The result is a regulatory equilibrium in which the zero risk-weighting persists not because it is analytically defensible but because its removal would have destabilising consequences that the incomplete fiscal architecture of the euro area cannot presently absorb. This is the clearest instance in the whole study of a banking-regulation problem whose solution lies outside banking regulation — in the constitutional and fiscal domain examined in the companion article on interpretation and the constitutional dimension of banking regulation — and it is for that reason that sovereign risk, rather than liquidity, represents the principal unresolved threat to euro-area stability (theme 2).
8. Geopolitical Risk: A Prospective Assessment
Unlike the previous crises, the analysis of geopolitical risk is necessarily prospective rather than retrospective. It rests on theoretical transmission channels rather than on demonstrated banking failures or regulatory outcomes, and it should be read in that light. To prevent speculation from being read as established fact, it is useful to separate what has been observed from what may follow.
The structural position of UK and French banks
UK banks occupy a central position in global dollar-liquidity intermediation, because London is the largest offshore hub for US-dollar wholesale funding outside the United States. Institutions such as HSBC and Barclays are therefore exposed to geopolitical shocks less through domestic lending than through global foreign-exchange (FX) swap markets, repo markets and derivatives-clearing activity. A large proportion of global dollar funding outside the United States is created through FX swaps, and that market is highly sensitive to shifts in global risk sentiment and liquidity conditions[16]. Euro-area banks, including BNP Paribas and Crédit Agricole, are exposed to similar mechanisms but with differing intensity: BNP Paribas, as a globally active investment bank, is closer to the UK profile, whereas the more domestically oriented Crédit Agricole is less structurally exposed to wholesale dollar markets.
Observed effects
During the Ukraine war, neither UK nor French banks experienced solvency stress or capital impairment. The transmission ran through energy-price volatility, inflation and global monetary tightening, which raised funding costs and collateral volatility in derivatives and repo markets but did not threaten bank viability. The Bank of England has repeatedly confirmed that the UK banking system remained resilient in capital terms, with stress concentrated in market-based finance and collateral-intensive segments such as pension funds and repo[17]. The principal observed vulnerability is therefore a liquidity-pricing problem rather than a credit problem (theme 1): access to dollars depends on market conditions, not on solvency, and swap spreads can widen rapidly during periods of geopolitical uncertainty.
Potential future effects
Iran-related tensions and any wider regional escalation would affect UK and EU banks principally through commodity-price channels rather than direct financial exposure. The transmission mechanisms can be ranked, in approximate order of likely significance, as follows:
5. Energy shock. Oil-price volatility feeding inflation and interest-rate expectations, with knock-on effects for sovereign-bond valuations.
6. Dollar-liquidity stress. Widening FX-swap spreads and tighter, more expensive offshore dollar funding for non-US banks.
7. Sanctions-compliance risk. Operational, legal and reputational exposure for globally active banks — the dimension most directly illustrated by the BNP Paribas precedent.
8. Cyber risk. Disruption of payment, clearing and settlement infrastructure, an operational-resilience concern only recently brought within the supervisory perimeter.
Because sovereign bonds form the core of Basel III liquidity buffers, an energy-driven rate shock would generate mark-to-market volatility in assets otherwise treated as highly liquid, increasing collateral sensitivity in repo and derivatives markets rather than threatening solvency. The ultimate stabiliser remains central-bank liquidity coordination, in particular the Federal Reserve swap lines with the Bank of England and the ECB that proved decisive in both 2008 and 2020. The honest conclusion is that geopolitical shocks are unlikely, under the current framework, to cause bank failures, but they can still produce episodic liquidity tightening that lies largely outside the Basel perimeter (theme 4); the regulatory response has so far been indirect, concentrated on operational resilience, geopolitical stress-testing and concentration risk rather than on capital.
The mechanism that ultimately contains these episodes is worth stating explicitly, because it underlines the central thesis of this study. Dollar funding acts as a global amplifier of financial stress precisely because it is short-term, market-based and highly sensitive to risk sentiment; when offshore dollar markets tighten, the decisive intervention comes not from prudential supervisors applying the LCR but from central-bank liquidity coordination — in particular the Federal Reserve swap lines that supply dollars to the Bank of England and the ECB[18]. The 2008 crisis and the COVID-19 shock both confirmed that these arrangements, rather than the Basel buffers themselves, prevented offshore dollar shortages from escalating into systemic banking crises. Geopolitical risk thus exemplifies theme 4 in its purest form: a category of systemic vulnerability that Basel can mitigate at the margin but cannot contain, and whose ultimate management lies with central banks and the architecture of international monetary cooperation.
9. Interpretation and Judicial Review
A dimension frequently neglected in economic analyses of banking regulation is the method by which the rules are interpreted — first by the supervisor in applying the legislation, and then, on review, by the courts. The three systems examined in this note diverge markedly at both levels. Regulators in the United Kingdom interpret an open-textured, principle-based framework with considerable discretion; French authorities operate within a more tightly text-bound tradition in which supervisory action must trace to a specific legislative power; and the European Central Bank and European Banking Authority apply harmonised rules through a teleological method oriented towards the objectives of integration. On judicial review the pattern is broadly the inverse of what the interpretative starting point might suggest: United Kingdom courts remain the most deferential to supervisory judgment, French administrative courts subject ACPR and AMF decisions to the most intensive scrutiny, and the Court of Justice of the European Union occupies a structured middle position combining purposive interpretation with proportionality-based review. These differences shape how far regulatory discretion can be challenged, and they connect directly to the constitutional conflict between the Court of Justice and the German Federal Constitutional Court over Article 125 TFEU discussed in Section 7. Because the subject raises methodological and constitutional questions of its own, the comparative analysis — together with the constitutional dimension of sovereign-debt mutualisation — is developed at length in a companion article, Interpretation, Judicial Review and the Constitutional Limits of Banking Regulation in the United Kingdom, France and the European Union.
10. Conclusion
The central conclusion of this study is that Basel-based regulation has largely succeeded in strengthening the resilience of banks against traditional banking risks, but that the principal threats to financial stability in the twenty-first century increasingly arise from sovereign, geopolitical and technological sources lying outside the original scope of Basel regulation. Three findings support this proposition.
Finding 1: Basel III solved many of the weaknesses exposed in 2008. Stronger and higher-quality capital, the leverage ratio, and — above all — the LCR and NSFR converted liquidity from an afterthought into a central pillar of supervision. The framework demonstrably absorbed rather than amplified the COVID-19 shock, transforming banks from amplifiers of crises into absorbers of macroeconomic shocks (themes 1 and 3). The qualifications set out in Section 6 — complexity, shadow-banking migration, residual model risk and continued dependence on central banks — temper but do not overturn this assessment. Finding 2: The euro area still faces unresolved sovereign-risk problems. The zero risk-weighting of sovereign exposures, sovereign concentration and the bank–sovereign doom loop persist notwithstanding the Banking Union, and the constitutional prohibition on debt mutualisation in Article 125 TFEU — unresolved between Luxembourg and Karlsruhe — remains a structural vulnerability that prudential rules cannot cure (theme 2). Mutualisation would require unanimous treaty amendment among all twenty-seven Member States, which is, at present, less than obvious.
Finding 3: Future threats increasingly originate outside traditional banking. Pandemics demand fiscal expenditure; geopolitical conflict generates energy, sanctions, dollar-liquidity and cyber risks; and digital finance raises questions for which Basel was never designed (theme 4). In each case the ultimate stabilisers are central banks and treasuries, not prudential supervisors, and the regulatory response has been indirect — operational resilience and stress-testing rather than capital. The recurring pattern (theme 3) is therefore clear: each crisis exposes weaknesses in the prevailing framework, prompts reform, and leaves new vulnerabilities for the next crisis to reveal. The sub-prime crisis exposed the inadequacy of Basel II; the sovereign-debt crisis exposed the structural weaknesses of the euro area; the pandemic demonstrated that prudential regulation alone cannot guarantee economic stability; and the geopolitical crises of the 2020s have revealed that traditional banking regulation was never designed to address energy dependency, sanctions compliance or strategic conflict. The contemporary challenge for regulators in the United Kingdom, France and the EU is not merely to complete Basel III — substantially accomplished by 2026 — but to recognise that the most significant threats to financial stability increasingly arise from domains lying beyond it.
The comparative analysis of interpretation, sketched in Section 9 and developed at length in the companion article on interpretation and judicial review, reinforces this conclusion from a different direction. Despite convergence on a common methodological vocabulary — purposive interpretation, proportionality and respect for expertise — the three systems continue to allocate interpretative authority differently, and the courts continue to review the exercise of that authority with markedly different intensity. These differences are not merely technical. They reflect divergent constitutional traditions, and they matter most precisely where prudential regulation reaches its limits — in the unresolved conflict between the Court of Justice and the German Federal Constitutional Court over Article 125 TFEU, examined in full in the same companion article, a conflict that no calibration of capital or liquidity ratios can resolve and that remains a structural vulnerability of the European project.
A forward-looking research agenda
Future regulatory research should focus upon:
• artificial intelligence in banking supervision;
• digital assets and central bank digital currencies;
• cyber-resilience and operational continuity;
• geopolitical financial risk and the architecture of sanctions; and
• the interaction between banking regulation and fiscal governance, in particular the future of Article 125 TFEU and the treatment of sovereign risk.
[1] On the concept of a deposit, R. Bollen, “What is a Deposit (and Why Does It Matter)?” (2006) 17 Journal of Banking and Finance Law and Practice 283. On the emerging fields reserved for separate treatment (AI, DeFi, crypto-assets, stablecoins, CBDCs and related developments), G. Finocchiaro, “The Regulation of Artificial Intelligence” (2024) 39 AI & Society 1966; OECD, Regulatory Approaches to Artificial Intelligence in Finance (2024).
[2] BCBS, Core Principles for Effective Banking Supervision; E. Jones & A.O. Zeitz, “The Limits of Globalizing Basel Banking Standards” (2017) 3(1) Journal of Financial Regulation 89; on origins, BCBS, History of the Basel Committee; R. Lall, “From Failure to Failure: The Politics of International Banking Regulation” (2012) 19(4) Review of International Political Economy 609.
[3] BCBS, International Convergence of Capital Measurement and Capital Standards (July 1988); BCBS, Amendment to the Capital Accord to Incorporate Market Risks (January 1996). On regulatory arbitrage under Basel I, M. Thiemann, “In the Shadow of Basel: How Competitive Politics Bred the Crisis” (2014) 21(6) Review of International Political Economy 1203.
[4] BCBS, International Convergence of Capital Measurement and Capital Standards: A Revised Framework (June 2004); Comprehensive Version (June 2006); R. Lall, Review of International Political Economy (2012) 609; H. Benink, “Global Bank Capital and Liquidity after 30 Years of Basel Accords” (2020) 13(4) Journal of Risk and Financial Management, Art 73.
[5] BCBS, Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems (December 2010, rev. June 2011); BCBS, Basel III: The Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools (January 2013); BCBS, Basel III: The Net Stable Funding Ratio (October 2014).
[6] C. Kobrak & M. Troëge, “From Basel to Bailouts: Forty Years of International Attempts to Bolster Bank Safety” (2015) 22(3) Financial History Review 221; S. Pagliari & M. Wilf, “Regulatory Novelty after Financial Crises: Evidence from International Banking and Securities Standards, 1975–2016” (2020) Regulation & Governance; BCBS, Basel III: Finalizing Post-Crisis Reforms (December 2017).
[7] Regulation (EU) 2024/1623 (CRR III) and Directive (EU) 2024/1619 (CRD VI), expressly presented as completing the Basel III implementation within EU law; BCBS, Basel III: Finalising Post-Crisis Reforms (BIS d424). On the SSM, Council Regulation (EU) No 1024/2013 and ECB Regulation (EU) No 468/2014.
[8] D. Tarullo, “Financial Regulation: Still Unsettled a Decade after the Crisis” (2019) 33(1) Journal of Economic Perspectives 61; E. Lee, “Basel III: Post-Financial Crisis International Financial Regulatory Reform” (2013) 28(11) Journal of International Banking Law and Regulation 433.
[9] M. Hellwig, “Systemic Risk in the Financial Sector: An Analysis of the Subprime-Mortgage Financial Crisis” (2009) 157 De Economist 129; D. Tori, E. Caverzasi & M. Gallegati, “Financial Production and the Subprime Mortgage Crisis” (2023) 33 Journal of Evolutionary Economics 573; H. van der Heijden, K. Dol & M. Oxley, “Western European Housing Systems and the Impact of the International Financial Crisis” (2011) 26 Journal of Housing and the Built Environment 295.
[10] House of Commons Treasury Committee, The Run on the Rock (HC 56, 2007–08), at publications.parliament.uk/pa/cm200708/cmselect/cmtreasy/56/56.pdf. See also the openly accessible analyses at academic.oup.com/cpe (article bzn007), emerald.com/jfrc (16/1/19), kansascityfed.org (RWP09-4), researchgate.net.
[11] P. De Grauwe, CESifo Working Paper Series (2013) (on Eurozone fragility).
[12] A. Capponi, F. Corell & J.E. Stiglitz, “Optimal Bailouts and the Doom Loop with a Financial Network” (2022) 128 Journal of Monetary Economics 35; O. de Bandt et al., Assessing the Impact of Basel III (Banque de France Working Paper No. 864, 2022 Commission Discussion Paper No. 122, 2019); Banque de France, Politique monétaire et contraintes de collatéral depuis la crise des dettes souveraines (Barthélemy, Bignon, Nguyen, 2018).
[13] OECD (2021); Berger et al. (2022), Journal of Financial Stability; Demirgüç-Kunt et al. (2021), World Bank Policy Research Working Paper; BIS (2020); Acharya and Steffen (2020); Borio and Gambacorta (2020), BIS Working Papers No. 930.
[14] Banque de France, L’Union bancaire : supervision des banques et résolution des crises bancaires dans l’UE (2024); O. de Bandt et al., Assessing the Impact of Basel III (Banque de France Working Paper No. 864, 2022); C. Debever & N. Toulemonde, Les déséquilibres TARGET2 en zone euro (Direction générale du Trésor, 2021); ACPR – Banque de France, at acpr.banque-france.fr.
[15] On the place of banking norms in the French legal order, P. Bégasse de Dhaem, “Crise, banque et mondialisation : retour aux fondations et perspectives critiques sur l’empire des normes bancaires”, Droit et société, 2020/1, n° 104, pp. 53–69 (open access via droit.cairn.info).
[16] BIS Quarterly Review, at bis.org/publ/qtrpdf/r_qt2003f (FX swaps and offshore dollar funding); IMF Working Paper (2020), Global Banks’ Dollar Funding: A Source of Financial Vulnerability; Bank of England, Financial Stability Report, at bankofengland.co.uk/financial-stability-report.
[17] Bank of England, Financial Stability Report, at bankofengland.co.uk/financial-stability-report; European Central Bank, Financial Stability Review, at ecb.europa.eu/pub/financial-stability/fsr/html/index.en.html.
[18] Federal Reserve, Central Bank Liquidity Swaps, at federalreserve.gov/monetarypolicy/bst_liquidityswaps.htm; IMF Working Paper (2023) on geopolitical risk and financial stability, at imf.org/en/Publications/WP/Issues/2023/03/10.