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Treasury 4.x - Trends for Insurers
The productivity and performance of the treasury function within insurance companies have undergone a transformative evolution, driven by the emergence of what is now termed Treasury 4.x.
Find out moreTake-aways for bank risk management, supervision and regulation
Early October, the Basel Committee on Banking Supervision (BCBS) published a report[1] on the 2023 banking turmoil that involved the failure of several US banks as well as Credit Suisse. The report draws lessons for banking regulation and supervision which may ultimately lead to changes in banking regulation as well as supervisory practices. In this article we summarize the main findings of the report[2]. Based on the report’s assessment, the most material consequences for banks, in our view, could be in the following areas:
The BCBS report first describes in some detail the events that led to the failure of each of the following banks in the spring of 2023:
While each failure involved various bank-specific factors, the BCBS report highlights common features (with the relevant banks indicated in brackets).
Of the four failed banks, only Credit Suisse was subject to the LCR requirements of the Basel III Accord, in relation to which the BCBS report includes the following observations:
Although not part of the BCBS report, these observations could lead to modifications to the LCR regulation in the future.
With respect to supervisory practices, the BCBS report identifies various lessons learned and raises a few questions, divided into four main areas:
1. Bank’s business models
2. Bank’s governance and risk management
3.Liquidity supervision
4. Supervisory judgment
In addition, the BCBS report identifies various potential enhancement to the design and implementation of bank regulation in four main areas:
1. Liquidity standards
2. IRRBB
3. Definition of regulatory capital
4. Application of the Basel framework
The BCBS report identifies common shortcomings in bank risk management practices and governance at the four banks that failed during the 2023 banking turmoil and summarizes key take-aways for bank supervision and regulation.
The identified shortcomings in bank risk management include gaps in the management of traditional banking risks (interest rate, liquidity and concentration risks), failure to appreciate the interrelation between individual risks, unsustainable business models driven by short-term incentives at the expense of appropriate risk management, poor risk culture, ineffective senior management and board oversight as well as a failure to adequately respond to supervisory feedback and recommendations.
Key take-aways for effective supervision include enforcing prompt action by banks in response to supervisory findings, actively monitoring and assessing potential implications of structural changes to the banking system, and maintaining effective cross-border supervisory cooperation.
Key lessons for regulatory standards include the importance of full and consistent implementation of Basel standards as well as potential enhancements of the Basel III liquidity standards, the regulatory treatment of interest rate risk in the banking book, the treatment of assets that are accounted for at amortised cost within regulatory capital and the role of additional Tier-1 capital instruments.
The BCBS report is intended as a starting point for discussion among banking regulators and supervisors about possible changes to banking regulation and supervisory practices. For those interested in engaging in discussions related to the insights and recommendations in the BCBS report, please feel free to contact Pieter Klaassen.
[1] Report on the 2023 banking turmoil (bis.org) (accessed on October 19, 2023)
[2] Although recognized as relevant in relation to the banking turmoil, the BCBS report explicitly excludes from its consideration the role and design of deposit guarantee schemes, the effectiveness of resolution arrangements, the use and design of central bank lending facilities and FX swap lines, and public support measures in banking crises.
The productivity and performance of the treasury function within insurance companies have undergone a transformative evolution, driven by the emergence of what is now termed Treasury 4.x.
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