A series of bank failures in the US and the demise of Credit Suisse in 2023 have put stress testing, recovery and resolution concerns at the forefront as regulators seek to avoid a repeat.
Regulators across the world are modifying their regulatory and supervisory approaches this year with a focus on non-systemic institutions, according to a recent EY report. Regulators realized that it is no longer sufficient to require financial institutions to just meet prudential requirements after witnessing US failures last year that were made worse by technology and social media.
«In hindsight, some liquidity regulation and most internal liquidity stress tests did not fully reflect changes in technology that impacted consumer behavior and increased the speed of digital runs across customers and products,» said the EY report on the global regulatory outlook for 2024.
Stress Testing
In addition to continued reporting of liquidity and stronger metrics, financial institutions will be expected to incorporate non-financial risk considerations in their stress test scenarios.
For example, the European Central Bank will stress test the cyber resilience of European banks this year. The European Banking Authority will also develop and execute a climate stress test.
Recovery and Resolution
Recovery and resolution concerns have also come under the spotlight. Following the bank failures in 2023, US regulators made proposals in August 2023 (rulemakings10) that seek to enhance resolution planning for large and regional banks.
«If finalized, these would result in enhanced resolution planning requirements and new long-term debt requirements for some institutions,» EY said.
Supervisory Effectiveness
Recent bank failures have also put the spotlight squarely on banking supervision. Increased speed and agility of supervision is now the focus as is self-identifying and addressing risk management issues and weaknesses.
Data-driven supervision is now the new approach for regulators who are also enhancing their role as «data hubs» as they seek to make data and information more accessible, usable and interoperable. Data harmonization and standardization will be vital to regulators. Australian watchdogs, for example, have made information sharing mandatory.
