Introduction

Good morning, and thank you for inviting me to speak at this roundtable. 

I should start with a confession. I spent some time debating what to cover in my speech today. The Basel Committee recently published its work programme for 2023–24, which covers a wide range of analytical, supervisory and regulatory initiatives.¹ This includes work on medium-term structural trends affecting the global banking system, including most notably the digitalisation of finance and climate-related financial risks. It also covers important supervisory initiatives on updating the core principles for effective banking supervision, assessing banks' interconnections with non-bank financial intermediation (NBFI) and shoring up banks' outsourcing practices and reliance on third- and fourth-party service providers. Any one of them would have been worthy of a speech in its own right.

But, in the end, I decided to focus my remarks on the recent episodes of banking stress and the implications for the Committee's work. In many ways, this was perhaps the first "real" stress test of the banking system (or at least parts of it) since the Great Financial Crisis; as many have previously observed, the banking system benefited from the huge scale of public support measures during the Covid-19 pandemic.² And, if the pandemic was a stress test, it stemmed from an exogenous shock, not a financial one. So it is important to take a step back and ask what happened, why it happened, and what it all means for banks, regulators and supervisors.

As you may have seen, the Committee recently announced that it is reviewing recent market developments and will take stock of the regulatory and supervisory implications from recent events, with a view to learning lessons.³ This work has already started. The Committee will discuss the outcome of this work in due course. So, in the meantime, I will be speaking today in a strictly personal capacity, offering some preliminary observations and raising some questions for further reflection. I will not prejudge the outcome of the Committee's stocktake, and I shall also refrain from commenting on individual banks or jurisdictions.

Back to (banking) basics

There has been no shortage of commentary on the recent turmoil in the banking system. Fingers have been pointed at banks’ risk management failings and ineffective governance, including with regard to NBFI exposures, interest rate risk and liquidity risk. Some commentators have been quick to highlight regulatory and supervisory frameworks. Others have dug up prescient statements about risks to banks; the Committee itself has been warning about the risks to banks from rising interest rates and a worsening macroeconomic outlook for over a year now. 4 And, alongside the Committee's own stocktake, many authorities are also in the process of reviewing the past few months and the lessons learnt.

Yet, unlike the Golden Age of whodunnits, there is unlikely to be a single culprit that will be revealed at the end.5 Instead, multiple factors are likely to have contributed to a series of the stress episodes, with numerous implications for banks and supervisors going forward. What’s more, history suggests that it may take some time to have a complete picture and assessment of what happened, why it happened, and where do we go from here.6 So my first observation today is that we should be humble and open-minded at this stage when it comes to assessing recent developments and the implications for banks, regulators and supervisors. We should not hastily jump to conclusions, nor should we close any doors. Nevertheless, once our stocktake is completed, remedial actions should be taken if deemed necessary.

With that caveat in place, my first preliminary takeaway from recent events is that we need to start by asking why, in 2023, some banks have failed to meet basic risk management and governance practices. To be clear, this is not necessarily a general pattern across the banking system and is more of a tail event. But, in times of stress, the financial chain is only as strong as its weakest link. Sound risk management and robust governance practices are the bread and butter of bank management. The boards and management of banks should be the first port of call in managing and overseeing risks; these functions cannot be outsourced to supervisors. Jumping straight to discussions about the regulatory and supervisory implications of recent events is akin to forgiving banks for not fulfilling their primary responsibilities and likewise shareholders for not exercising due diligence.

The essential role of these banking building blocks has long been recognised and articulated by the Committee. For example, the Basel framework stipulates that “bank management is responsible for understanding the nature and level of risk being taken by the bank and how this risk relates to adequate capital levels”.7 It goes on to note that bank management “is also responsible for ensuring that the formality and sophistication of the risk management processes are appropriate in light of the risk profile and business plan”.8

These supervisory expectations are complemented by a set of additional guidelines on corporate governance principles for banks worldwide, which cover banks' risk management function and the role of senior management and the Board.9 Meeting these guidelines should not be a box-ticking exercise but rather should take the form of a deeply embedded mindset at all levels of any bank.

These banking “basics” also apply when it comes to the fundamentals of risk management and oversight by banks. A bank’s Board, senior management and risk management function should be asking themselves questions in a timely fashion and taking credible measures to shore up resilience. They should respond promptly to material developments such as the rapid growth of a bank’s balance sheet, an excessive reliance on a limited set of revenue or funding sources, ineffective asset-liability management, a growing number of misconduct incidents, changes in the economic environment such as (expected) changes in interest rates or economic growth, or the inability to consider a broad set of “what if” stress-type scenarios.