The Basel Committee has put forth a stern call for substantial enhancements in banking supervision, emphasising the necessity of vigilant oversight of banks with unsustainable business models, which it referred to as “outlier” banks.
The tumult, which witnessed the collapse of several notable U.S. banking entities, including Silicon Valley Bank, and the high-profile, enforced acquisition of Credit Suisse by UBS, has been declared the most acute stress experienced in the sector since the 2008 global financial crisis.
According to Reuters, the Basel Committee announced its resolve to amplify efforts in making bank supervision more potent and proactively identifying “outlier” banks, by scrutinising their risk management procedures, business model viability, and sustainability with a more astute lens.
The need for supervisors to adopt a more proactive, “forward-looking perspective” has been underscored, with the committee stating, “Supervisors should take prompt action to ensure that any deficiencies are addressed.” The Committee also voiced its understanding that a purely “rules-based” approach to supervision was insufficient and stressed that supervisors should consistently monitor risk dynamics across banking groups, a lesson accentuated by the particularly distressing scenario involving Credit Suisse.
In addition to reinforcing supervisory measures, the Basel Committee disclosed its intention to publish a consultation paper that will impose a mandate on banks to reveal climate-related financial risks and to consult on disclosure requisites connected to banks’ exposures to cryptoassets. Liquidity rules are also set to be reviewed, following the comparatively rapid outflows of deposits experienced during the March crisis, which were partly attributed to the influence of social media and the pervasiveness of digital tools in banking.
However, the Basel Committee cautioned that despite having two liquidity buffers – the liquidity coverage ratio (LCR) and a second tied to longer-term funding, liquidity regulations might not be able to forestall all liquidity runs on banks in an era dominated by effortless access to both information and banking services through various digital platforms. Furthermore, the committee expressed the importance of a comprehensive assessment of the complexity, transparency, and comprehension of AT1 debt instruments.
The implications of these regulatory shifts and supervisory adaptations will likely ripple through the global banking sector, prompting a recalibration of strategies and protocols to navigate through the evolving financial landscape shaped by crises, technological advancements, and an ever-increasing emphasis on transparency and risk management.
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