Second, I will discuss the shift in lending from the banking sector to other market participants and the interconnectedness between banks and the non-bank financial intermediation (NBFI) sector.
The Greek philosopher Heraclitus tells us that there is nothing permanent except change. The financial sector is no exception to this truth. Tech stores don’t yet offer crystal balls – maybe they will one day, but for now we are living in a world where we cannot predict the future. But we can and must be forward-looking in our risk assessments. And we must make sure we are well equipped for whatever the future holds. In this spirit, I would like to focus my remarks today on three fundamental shifts in finance and the challenges they pose to us as supervisors.
First, I would like to talk about the bank failures we have recently witnessed and the challenges associated with high inflation and rising interest rates.
Second, I will discuss the shift in lending from the banking sector to other market participants and the interconnectedness between banks and the non-bank financial intermediation (NBFI) sector.
My third point relates to the impact of the digital transformation on the competitive landscape in banking. The financial value chain is fragmenting and being reshaped, which poses challenges for the “supervisability” of the financial sector
Recent crisis events and risks from rising interest rates
A great deal has already been said about the recent crisis events and their underlying causes. While there is no direct read-across from the US events to the banks we supervise in the euro area, I think we would all benefit from looking carefully at the weaknesses these events have revealed and the lessons we can learn.
Failure to properly manage risks is at the core of bank failures. And more often than not, inadequate risk management is the direct result of poor governance. In recent crisis cases, we saw excessive growth strategies combined with a lack of commensurate risk management. This should be a flashing warning light for any supervisor. As the Federal Reserve’s report on Silicon Valley Bank (SVB) explained so clearly, the bank’s management team failed to manage basic interest and liquidity risk and its board of directors failed to oversee the management team and hold it accountable. These events have quite rightly raised questions about governance and risk management in banks and the perils of unrealised losses from “held-to-maturity” portfolios in an environment of rising interest rates. And questions are being asked about the effectiveness of supervision not only in the United States but also in Switzerland, following the arranged takeover of Credit Suisse by UBS. And in their brutally honest reviews of what went wrong, the Federal Reserve and the Federal Deposit Insurance Corporation have – to their credit – acknowledged a failure to take forceful and sufficiently swift supervisory action.
SVB is more than a textbook case of mismanagement. It also showed how a bank run today happens far more quickly than in the past: USD 42 billion left the bank in just five hours. The bank’s highly networked and concentrated depositor base seems to have been one of the key factors behind the unprecedented speed of deposit withdrawals. But we should also consider the impact of social media and digitalisation here. Social media enabled depositors to instantly share their concerns about a bank run, and digitalisation made it possible for them to immediately withdraw their funds. We may need to assess how factors such as a highly concentrated deposit base and a particular reliance on uninsured deposits can be addressed in the Pillar 2 framework. I will return to the broader impact of digitalisation on the financial landscape later in my speech....
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