London School of Economics Grantham Research Institue on Climate Change and the Environment
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Are global financial regulations fit for purpose in a climate-constrained world?

Published 27 June, 2025 Event

Thursday, 3rd July 2025
12:30 – 14:00 (CEST)
Side Event 9, 4th Finance for Development (FfD) Conference in Seville

Emerging markets and developing economies (EMDEs) face a $1 trillion climate finance gap. Yet, existing prudential rules may be unintentionally constraining cross-border investment flows just when they are most needed.

Join us for an official side event at the 4th Finance for Development (FfD) Conference in Seville hosted by CETEx and its partners, presenting new research on how regulatory reform can better align global financial stability objectives with the climate and development priorities of EMDEs.

Topics include:

  • The unintended impacts of Basel III on SME exposures, infrastructure finance and domestic green bond markets
  • The treatment of public guarantees and derisking instruments
  • Proposals for regulatory flexibility and proportionality tailored to EMDE contexts

Featuring insights from leading researchers and policy practioners, including:

  • Rob Patalano: CETEx
  • Liliana Rojas-Suarez: CGDev
  • Chowdhury Liakat Ali: Bangladesh Bank
  • Jakub Demski: BIS
  • Sonja Gibbs: IIF
  • Ben Weisman: GFANZ
  • Barbara Oldani: Nature Finance & SSDH
  • Agnieszka Smoleńska: CETEx
  • Geraldine Ang: OECD
  • Joseph Feyertag: CETEx
Context

Emerging markets and developing economies (EMDEs) will require $1 trillion in external finance to meet climate mitigation and adaptation needs as defined by the Paris Agreement (Bhattacharya et al., 2024). With increasing pressure on public finances and more general macroeconomic headwinds, there is likely to be an increasing emphasis on the need for global regulatory reform to create a more enabling environment for public and private investors in order to accelerate the availability of necessary cross-border finance flows. Current debates around the need for regulatory reform revolve around three main axes.

Financial stability: First, there is a continued need for prudential authorities to strengthen the banking sector in order to make it more resilient to shocks and financial crises. Since the Global Financial Crisis (GFC), these efforts have largely revolved around internal governance requirements and increasing the amount of capital that banks are required to hold in order to provide a buffer against unexpected losses. The development and implementation of the Basel III framework has been the main vehicle for encouraging banks to engage in more prudent risk management practices, for instance by introducing an ‘output floor’ that limits the extent to which banks can use internal models to reduce their capital requirements, by imposing a revised leverage ratio to ensure that banks have sufficient capital relative to their assets, by increasing the cost of taking on more risks (such as through securitisations) or by introducing new liquidity ratios.

Discriminatory treatment of cross-border finance flows to EMDEs: Second, there has been lively debate around whether these efforts to strengthen financial stability are having unintended consequences on cross-border capital flows to emerging markets and developing economies (EMDEs). Research has suggested that the implementation of Basel III can lead to financial retrenchment from EMDEs, particularly when it comes to negative spillover effects on domestic banks, the availability of finance for Small- and Medium-sized Enterprises (SMEs), or the dampening effect that capital or liquidity requirements could have on infrastructure finance (Beck and Rojas-Suarez, 2019; Fišera et al., 2025). There are increasing calls to integrate proportionality principles or flexibility mechanisms into existing regulation or to make the prudential treatment of relatively safe assets in EMDEs commensurate to the actual financial risks they face.

Treatment of public derisking instruments: Finally, under the helm of the Bridgetown Initiative and its call for urgent and decisive action to reform the international finance architecture – particularly in relation to multilateral development banks (MDBs) – there have been increasing concerns around the treatment of trade finance or credit guarantees by public finance institutions under the Basel framework (Songwe et al., 2024). Despite their role in derisking certain instruments, public guarantees or letters of credit by certain public finance institutions may attract higher capital charges under the current framework and thereby disincentivise their use and potential.

These debates have led to an increasing number of academic and policy-oriented commentators to question whether the implementation of regulatory reforms are actually achieving their aim of safeguarding global financial stability. While national and international prudential authorities have made great strides in developing and implementing a more prudent approaches to finance and investment in the interests of global financial stability, EMDEs themselves might be negatively affected. Their high exposure to environment-related risks, associated investment needs and higher reliance on cross-border finance flows may require more balanced regulatory framework that reflects their specific needs, particularly in relation to the medium- to long-term risks that the low-carbon transition, climate change and biodiversity loss pose to their financial stability.

Objective

This side event will build on existing evidence and present new policy-relevant findings based on recent findings from cutting-edge research conducted by the LSE and its collaborators. The event will contribute to ongoing debates about the role of regulatory flexibility, proportionality, and coherence in shaping a global financial architecture conducive to sustainable development. 

Agenda

12:30 – 12:40 Arrival
Rob Patalano (CETEx/LSE): Introduction

12:40 – 13:20 Session 1: does the current Basel III framework cause direct or indirect discriminatory effects for cross-border finance flows to EMDEs?

Moderator: Rob Patalano (CETEx/LSE)

  • Agnieszka Smoleńska (CETEx/LSE): Theory and conceptualisation: what are the potential ways in which the Basel III framework can inhibit capital flows to EMDEs?
  • Geraldine Ang (OECD): Unintended consequences of Basel III on capital-intensive infrastructure investment in EMDEs
  • Chowdhury Liakat Ali (Bangladesh Bank): Providing a local perspective: the impact of Basel III on cross-border finance flows to Bangladesh
  • Ben Weisman (GFANZ): Lifting prudential barriers to mobilizing private capital for development finance

13:20 – 14:00 Session 2: Countervailing measures and policy options for prudential authorities

Moderator: Joseph Feyertag (CETEx/LSE)

  • Chowdhury Liakat Ali (Bangladesh Bank): Applying regulations in a proportionate way
  • Jakub Demski (BIS): Exploring the favourable treatment of sustainable bonds in EMDEs together with governance safeguards
  • Barbara Oldani (Nature finance/Sustainable Sovereign Debt Hub): The limits of CRA methodologies and the treatment of MDBs
  • Sonja Gibbs (Institute of International Finance – IIF): Policy proposals on prudential regulation for MDB and DFI transactions
  • Liliana Rojas-Suarez (CGDev)