Title: Why Financial Watchdogs Need to Increase Their Budgets to Prevent Bankruptcies
Introduction
Despite regulatory adjustments aimed at preventing banking crises, instances of bankruptcies are still rampant. The head of the umbrella body for central banks, Agustín Carstens, opines that intensification of day-to-day supervision is the key to stabilizing banks better. In this article, we explore the reasons why financial watchdogs need to increase their budgets significantly to avoid calamitous collapses.
The Root Causes of Bankruptcies
Agustín Carstens attributes the recent banking crises to inadequate risk management measures, poor business models, and weak governance. Most of these issues existed before depositors fled and investors lost confidence in the banks. Agustín Carstens insists that regulatory adjustments may not work as there is no level of minimum capital and liquidity that can support a bank with an unsustainable business model. Therefore, banking supervision needs to get better.
Why Financial Watchdogs Need to Increase Their Budgets
Agustín Carstens asserts that banking supervision budgets should increase significantly to enhance the effectiveness of supervisors. The money will enable supervisors to ensure that banks are better managed and can withstand the impact of changing interest rates and advancing technology, particularly in the area of cybersecurity. Increased spending on regulation is expected to reduce the likelihood of bank failures and their potential to destabilize the economy.
Sources of Funding for Financial Supervision
There are several options for financing increased financial supervision. They include higher contributions from banks, cutting back on other budget areas, increasing taxes, or turning to international agencies.
Leading Regions in Need of Increased Supervision Spending
Although Agustin Carstens did not specify the regions that need to increase their supervision budgets, most of the biggest bankruptcies of 2023 appear to have occurred among medium-sized US lenders like Signature Bank and First Republic. However, smaller banks in the European bloc face higher supervisory costs than their American counterparts.
The Role of Technology in Regulating Banks
Banking regulation faces many challenges due to the disruption of technology in the banking sector. Therefore, banking supervisors need to have adequate expertise in cybersecurity, data analytics, and artificial intelligence to keep pace with the far-reaching impact of technology. With enough resources and technological tools, banking supervisors can identify more vulnerabilities at an early stage and address them before problems become too complex to handle.
Additional Piece:
The Impact of Banking Crises on the Economy
Banking crises are not just a problem for individual bank customers and shareholders. They have long-lasting repercussions on local and global economies. Here are several ways banking crises hurt ordinary citizens’ lives, and business operations:
1. Job Losses
Banking crises lead to reduced credit to businesses, especially small and medium-sized firms. Such firms typically receive short-term loans from banks, which they use to finance their day-to-day operations. Without these loans, companies struggle to remain operational, causing retrenchment in the long run.
2. Housing Bubble Bursts
Banking crises reveal issues with property investment, including when banks tide over the housing market with easy mortgages and high leverage ratios. When these mortgages mature, if the borrower defaults, only two outcomes follow: take over the asset and sell it for a loss (and make the borrower poorer) or get bailed out by the central bank. The latter often proves to be very costly and leads to a decline in housing prices.
3. Business Shutdowns
Secondary bankruptcies are common during banking crises as a result of collapsing firms. For example, suppliers whose main client is a failing bank will suffer losses that may lead to the demise of their businesses.
4. Taxpayer Costs
Central banks often issue guarantees to deposit accounts, which means taxpayers end up directly or indirectly footing the bill when the collapsing institutions are nationalized.
5. Economic Recession
Banking crises can trigger recessions and depressions, characterized by falling GDP growth rates and rising unemployment rates. The knock-on effect on foreign trade means that countries with significant trade flows suffer adverse consequences such as currency depreciation and further unemployment that impact all of their sectors.
Summary:
The failures of directors and senior management to fulfill their responsibilities serve as the root causes of banking crises. Financial regulation adjustments may not be enough, and banking supervision budgets should increase significantly to help supervisors ensure that banks are better managed and can withstand changing interest rates and advancing technology. The source of funding can be from several options such as higher contributions from banks, cutting down on other budget areas, increasing taxes, or turning to international agencies.
Banking crises have long-lasting repercussions on local and global economies, including job losses, housing bubble bursts, business shutdowns, taxpayer costs, and economic recession. Therefore, it is essential to have adequate expertise in cybersecurity, data analytics, and artificial intelligence to address the far-reaching impact of technology. Regulators can mitigate crises by identifying more vulnerabilities at an early stage and addressing them before they become unmanageable.
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Financial watchdogs need to “significantly” increase their budgets in the wake of recent banking crises, the head of the umbrella body for central banks said, arguing that more intensive day-to-day supervision is key to preventing bankruptcies.
Global politicians are weighing up rule changes to better insulate banks from risks such as fluctuating interest rates and faster flight of deposits, two factors that fueled the biggest wave of crashes since the 2007-2008 global financial crisis. Among the more high-profile bankruptcies, Silicon Valley Bank was shut down by the Federal Deposit Insurance Corporation in early March, while Credit Suisse was forcibly sold to Swiss rival UBS a week later.
Agustín Carstens, head of the Bank for International Settlements, said that while there was a case for making regulatory “adjustments”, the approach had its limitations because “there is simply no reasonable level of minimum capital and liquidity that can make a profitable bank if it has an unsustainable business model or bad governance”.
“The root cause of the recent banking crises has been the failure of directors and senior management to fulfill their responsibilities,” he said at the European Banking Federation’s annual conference in Brussels on Thursday. “The business models were poor, the risk management procedures woefully inadequate and the governance lacking.”
Carstens, whose institution is responsible for global financial stability and hosts the Basel Committee on Banking Supervision, said such problems “existed well before depositors ran and investors lost confidence” and many of them should have been addressed. “identified and resolved in advance”.
“Banking supervision needs to up its game,” he said, arguing spending needs to increase “significantly” to help supervisors ensure banks are better managed and can cope with the impact of changing rates of interest or technological advances that allow for faster bank runs.
Increased regulatory spending could be financed by a “range” of options, including higher contributions from banks. “Some will no doubt complain,” she said. “But this would be money well spent. Financial crises generate huge social and financial costs. By reducing their likelihood, investments in a more effective supervisory framework will certainly pay off.”
Carstens did not specify which regions should spend more. Most of the 2023 bankruptcies involved medium-sized US lenders such as Signature Bank and First Republic. The Federal Reserve She said The California-based SVB’s oversight lacked “sufficient strength and urgency,” but its implosion was mainly caused by a relaxation of rules under Donald Trump’s presidency, including a change that allowed mid-sized banks not to set aside any principal for unrealized losses in their securities portfolios.
A recent relationship by Oliver Wyman found that average supervisory fees paid by US banks are already double the level of fees in the EU, although smaller banks in the European bloc face higher supervisory costs than in the US. A global bank executive said large jurisdictions have spent large sums on oversight, citing the Operating budget of $2.4 billion of the FDIC. “The question is, are they [regulators] spend money the right way,” he added.
Carstens called on supervisors to “find and develop sufficient expertise in areas such as cybersecurity, data analytics and artificial intelligence” so they can keep pace with the “far-reaching impact of technology disruption” and improve their efficiency.
“With enough resources and the help of technology, supervisors will be able to identify more vulnerabilities at an early stage and act on them before problems become too big and complex to handle,” he said, adding that “such investments will certainly reduce” the likelihood of bank failures and their ability to destabilize the financial system.
https://www.ft.com/content/1c849c74-6c31-40f2-86cb-7bca7b2ad552
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