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Recent bank failures and the emerging regulatory focus

Recent bank failures in the US and bank acquisitions, on both sides of the Atlantic, are expected to put pressure on banking institutions to examine and rationalise their corporate governance and risk management operations, and market monitoring systems, as well as undertake overall stress testing of their capital and liquidity levels, novel activities, complexity, and business models.

It is a reminder of the vital importance of an effective risk management programme to maintaining the safe and sound operations of the bank. Looking ahead, we anticipate additional supervisory expectations and rulemakings, as well as increased scrutiny over how banks are managing against seven risks to the banking system


1. Balance Sheet Management

 Banks that sought higher returns and purchased longer-term investments saw the value of those investments decline in a rising rate environment. In some instances, these securities were high-quality and government-backed debt instruments and were not subject to risk-based capital reserve requirements (e.g., minimum regulatory capital requirements). 

Although these instruments can be used to quickly generate liquidity when needed during a stress event, they are also sensitive to swings in interest rates and broader economic scenarios. As a result, banks should immediately evaluate their growth drivers, liquidity monitoring and stress testing scenarios.

2. Customer Base

 Banks often compete by focusing on specific customer groups or industry sectors. This focus can be a competitive strength, but can also create concentration risk. Concentrations are risky because the exposure tends to move in the same direction. Banks need to understand and monitor for the concentrations they have and develop strategies to mitigate them. 

Banks need to understand the operating and financial environment of their customers and liquidity risks arising from customers’ business model(s) (e.g., cryptoassets, stablecoin-related reserves, etc). They need to evaluate the risks to their financial position and deposit base, counterparty risks from customers’ funding sources and highly networked business model(s), and risks related to the geographies where the bank and customers operate. Concentrations by customer type and funding model will also be a focal point.

3. Faster Payments

Since the 2008 financial crisis, payment technologies have increased access and accelerated the speed of payments. The rapid outflows and velocity at which customer withdrawals can occur can result in a near immediate run on the bank. In response, banks must adjust their liquidity plans and deposit operations accordingly. 

This includes assumptions about the number of cash sources available to the bank and at what cost. The liquidity risk framework should include the process for tapping each liquidity source and the timing of each, as well as the technology to enable rapid inflows and outflows. Liquidity stress tests should be performed to confirm assumptions. Early warning triggers and social media monitoring for potential deposit outflows should be put in place and monitored with appropriate frequency. 

4. Communications

 Poor communication, externally and internally, by the Board, senior management, and key stakeholders can cause regulators, customers, investors, and the public to lose confidence in a bank’s financial position. Banks need to carefully consider the timing of communications, the messaging, distribution channels, the people and audiences involved, and feedback loops. 

Banks will also need to contend with social media echo chambers where views and narratives are shaped and disseminated at speed and at scale by the press, social media influencers, customers, short sellers, and competitors. They should revisit and test the crisis management playbook to include a deposit run and liquidity crisis and include in the playbook any early warning triggers from stakeholders who are not customers.

5. Interest Rate Risk Management

Banks will need to continue to monitor central banks’ monetary policy committees.  In the US, for example, the Federal Open Market Committee (FOMC) has operated in a clear and transparent manner in promoting its views on how it plans to conduct monetary policy. It has also communicated the path and timing for reducing the size of their balance sheet and its determinations for the forward-looking federal funds rate.

With the expectation of continued near-term rate increases, banks will need to continue to monitor and manage for their asset-liability mismatches, loan books tied to riskier assets, securities financing, digital-asset related deposit management, and manage their liquidity stress testing and management framework.


6. Management and Personnel

 Banks must ensure they hire and retain qualified personnel in the bank’s critical risk management and operational areas (e.g., risk management, communications, finance). They must ensure there are no critical coverage gaps in key positions and that there is appropriate expertise for the bank’s risk profile. The Board must ask vital questions about the robustness of the bank’s personnel strategy and practices.

Investments in risk and compliance talent are key, as the desired resource profile has shifted from ‘assessment/check the box’ towards expertise with analytics and data modelling, quantitative techniques, next generation risk, and compliance tools/surveillance systems. Regulators will also scrutinize executive compensation and clawback provisions, as well as the timing of any payments.  


7. Deposit Data Considerations

Banks must reconcile and remediate existing data gaps, recordkeeping, and take the appropriate steps to ensure complete and accurate record keeping at the point of client onboarding/account origination. Further, efforts to better understand current deposit-level concentrations may be important to minimize liquidity risk and enable account diversification. 

It is worth noting that, in the UK, it is a regulatory requirement under the Financial Services Compensation Scheme to be able to report customer deposit holder data promptly and accurately, which is particularly important during a stress scenario.

As we consider lessons learned to date from the current situation and examine whether the actions taken by governments and regulators can isolate these impacts, banks should strike a meaningful balance between generating profits and navigating regulatory complexity. 




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Peter Dugas

Peter Dugas

Executive Director


Member since

16 May



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Banks nowadays are in stiff competition for human resources with fintech. The financial technology sector often offers higher pay. Still, the prospects of many such start-ups are difficult to forecast – they are as likely to occupy a solid niche as they are to go bust. Stable companies in Latvia are only a handful. Primarily, fintech players active in Latvia are headquartered in foreign countries – the United Kingdom, to name one – despite maintaining offices in Riga and employing staff in Latvia

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