The Basel Committee on Banking Supervision came to remind us that the year 2023 was the scene of a small banking crisis which could have
easily slip. It is always surprising to see that after 197 episodes of bank failure since 1870, regulatory authorities must still deplore the fact that many of these institutions are still under the yoke of short-term diktat, thus subordinating prudential risk management to remuneration. more immediate.
The banking crisis of early 2023 was quickly contained and relegated to the status of an idiosyncratic risk. Here we mean a specific risk which concerns a particular company or institution (or even an industry), as opposed to a systemic risk. This did not prevent the Basel Committee from reporting and submitting a summary of its observations and recommendations on October 5.
In a reflection presented in mid-September by Pablo Hernández de Cos, president of the Basel Committee on banking supervision and governor of the Bank of Spain, nevertheless recalled that what has taken on the appearance of an epiphenomenon was the most significant system-wide banking stress since the great financial crisis of 2008, in terms of its scale and scope.
Bankruptcy of First Republic Bank, taken over by JPMorgan, collapse of Silicon Valley Bank and Signature Bank in March… “In the space of
11 days — from March 8 to 19, 2023 —,
four banks with total assets of approximately $900 billion were closed, placed in receivership or bailed out. This was followed by the bankruptcy of a fifth bank with approximately $230 billion in assets on 1er May 2023,” recalled the president of the Basel Committee, housed under the supervision of the Banque des
international regulations.
We are still far from the scale of the 2008 crisis, with the implosion of the banks Washington Mutual, Lehman
Brothers and Bear Stearns followed by a cascade of bankruptcies in the American banking system. From 2008 to 2015, more than 500 government-insured banks failed, we read in the New York Times. But the lessons to be learned about the resilience of the banking system still remain the same despite the regulatory reforms reinforced by the liquidity crisis of 2008, notably under Basel III. We are talking about recurring problems observed during previous banking crises.
In his personal point of view, Pablo Hernández de Cos insists that the boards of directors and management of banks must be the first point of contact, or even compose the first line, when it comes to risk management and monitoring. “These functions cannot be outsourced to supervisors. » At the same time, shareholders are also challenged with their duty of care
reasonable.
However, the banking crisis of 2023 has highlighted fundamental shortcomings in the management – albeit basic – of traditional banking risks, such as interest rate risk and liquidity risk, as well as various forms of concentration risk. Added to this was an inability to understand the extent to which the various risks that
accumulated were interdependent and could get worse. It all comes down to “inadequate and unsustainable” business models,
notably an excessive focus on short-term growth and profitability (fueled by remuneration policies), to the detriment of appropriate risk management”. In short, poor risk culture and ineffective oversight from senior management and the board of directors.
“Many of these elements may seem obvious and quite fundamental, according to Mr. Hernández de Cos. It is therefore of great concern that in 2023, the boards and senior management of some banks have failed in their most basic responsibilities of overseeing and questioning the strategy and risk tolerance of a bank. Clearly, more needs to be done to consolidate these responsibilities. »
Especially since digitalization and social media play a very sensitive role in the inflow and outflow of capital. “Throughout modern financial history, advances in communications technologies have accelerated the flow of information, thereby affecting the nature and scale of banking crises. » If only all these rumors can spread instantly, via the
social networks.
But the Governor of the Bank of Spain asked: is it simply inevitable that there will always be “aberrant” banks with serious deficiencies in terms of governance and
risk management ? Is this a “characteristic” of a banking model that combines leverage and maturity transformation with a focus on short-term gains? Have we optimized the alignment of incentives between bank boards and senior management and broader stability goals?
financial? “I don’t have the answers to all of these questions, but I think they certainly deserve further thought. »