A speech by Fed’s Bowman maintains last year’s post-mortems on bank failures had too many shortcomings and are having too much influence on current supervisory priorities.
Banking regulation is one of those slippery, even Sisyphean tasks. Changes in direction usually have unforeseeable short-, medium-, and long-term consequences all bundled into one – not to mention that they tend to come, as with Basel III, in one big, impenetrable package.
Often, you only discover the true impact with the benefit of years of hindsight. Do too much, and learn the wrong lessons from mistakes, and you may end up snuffing out the last inch of commercial business from private institutions to the point that it is hard to tell if they have become quasi-public - or even nationalized.
If you do too little or go off on some tangent, well, you can end up with a Credit Suisse, an SVB, or a Signature Bank.
Between the Lines
That, at least, seems to be the indirect message in an overnight speech by Federal Reserve (Fed) member Michelle Bowman.
In it, she mentioned that «several» post-mortem reviews were made last year analyzing the factors that prompted Silicon Valley Bank and Signature to fail.
«Many of these reviews suffered from serious shortcomings, including compressed timeframes for completion and the significantly limited matters that were within the scope of review. Nevertheless, these reviews were, and continue to be, singularly relied upon as a basis for resetting regulatory and supervisory priorities,» Bowman told attendees of the South Carolina Bankers Association.
Singling Out Socials
In May, as finews.asia reported, Bowman discussed the speed of new-age bank runs while specifically singling out the role social media played in Credit Suisse’s share price volatility.
In June, she called for an independent post-mortem, or a third-party review, of what brought all the three banks down.
In all of it, there is a straight line of thinking from back then until now - if you don’t sit back and try to figure out what happened, or focus on the right priorities, you can’t maintain stability and fix mistakes.
Bad Influences
Moreover, there is another facet to all of it that is even more troubling. According to her, the findings from the limited reviews made last year continue «to influence proposals that had long been in the pipeline, especially those related to capital reforms».
In other words, they are putting a band-aid on top of a cut that is not even there.
«Many were undertaken or expanded with the purported goal to help address root causes of the bank failures and banking system stress. But this also included a rulemaking agenda that at times had little to no nexus with the root causes of the failures,» Bowman maintained.
Highest Priority
She believes regulators must now correct course, and return to making safety and soundness the highest priority of banking supervision.
«Last year’s stress, precipitated by the spring bank failures, validated the tenet that supervision, when implemented effectively and appropriately, is the single most effective tool to support a safe and sound banking system,» she believes.
By that, she means regulators failed to appreciate «identify and prioritize the appropriate» areas of risk, such as concentration and interest rate risk, which are not that particularly earth-shattering and new for the banking industry. That was particularly salient in the case of SVB, which had a highly focused, uninsured base of depositors and little proper management of interest rate risk.
Big Distraction
«In my view, the problems in 2023 resulted from a failure to identify and prioritize the appropriate areas of risk. Instead, the focus was on broader, more qualitative, more process- and policy-oriented areas of risk. This focus resulted in a disproportionate emphasis on issues that distracted from the fundamental risks to the bank’s balance sheet,» she indicated.
As an example, she mentions last year’s climate guidance introduced by federal banking agencies.«While perhaps well-intended, this guidance mandates a diversion of limited supervisory resources away from critical, near-term safety and soundness risks... And here, the evidence suggests that climate change is not currently a prominent financial risk to the banking system,» she said.
Not Transparent Enough
She also believes that supervisors are not transparent enough and that banks need to be held to standards that are «known and identifiable». Even when they change over time, something that is inevitable, «we should give advance notice to our regulated institutions so that they can manage their businesses accordingly to ensure continued compliance».
All of this has relevant lessons for Switzerland - from the Parliamentary Investigation Commission report about Credit Suisse expected later this year to Finma’s recent public thoughts about the areas of competence it needs in the future.
Let’s hope they are all on good terms with US-based banking supervisors or are at least reading Bowman’s speeches relatively closely and tallying them up with their own experiences and findings.
