As bank regulation continues to evolve, there are actions businesses can take in the near term to position themselves given the recent lessons learned from market events. For many, the expected upcoming regulatory scrutiny will result in higher-touch supervision, particularly on the stability of deposit funding and interest rate risk management. For many banks, measures can be taken to gain a competitive advantage, drive growth, and increase profitability while also protecting themselves and their assets from potential losses and risks. Discover in our latest perspectives what the recent developments can mean for your organization and how you may prepare to respond.
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On July 27, 2023, the federal banking regulators—i.e., the FRB, the OCC, and the FDIC—released the long-awaited US Basel III Final Reforms
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On April 28, the Board of Governors of the Federal Reserve System (FRB) and the Federal Deposit Insurance Corporation (FDIC) published reports on the specific risk and supervisory issues that led to two significant bank failures in March of this year.
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By March 2023, the US economy experienced a shock to the banking industry as a result of multiple bank failures, primarily driven by substantial liquidity and interest rate risk management weaknesses. These failures have raised questions on the health of the US banking system given the speed at which the recent events took place. Have challenges related to banks deemed as “too big to fail” really been addressed? Are the existing regulatory frameworks keeping pace with the risks posed by large regional banks? In the absence of stronger resolution and recovery planning requirements for large regional banks, regulators believe failures are highly likely to pose substantial risks to the banking system and potentially further erode a loss of trust in the US banking system.
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The stability of the banking system experienced a recent shock largely due to concerns around interest rate risk management practices and liquidity mismatches, together with a loss of market confidence in certain large institutions. During such times of distress, it is even more important that regulatory bodies across the globe have a clear understanding of the risks global firms pose to their respective jurisdictions, which largely crystallize through the legal entities they supervise and the relationships those entities have with internal and external counterparties.
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The recently finalized FR 2052a reporting rule is the next evolution of liquidity data reporting requirements, increasing the level of detail of an institution’s liquidity profile, including additional information on securities financing transactions, wholesale unsecured funding, deposits, loans, unfunded commitments, collateral, derivatives, and foreign exchange.
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Global and local financial regulators have reinforced their requirements for strengthening governance, risk management, and controls since the financial crisis in 2008 through new regulations, supervisory guidance, and focused examinations and inspections.
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US regulators have reiterated the requirements and expectations for banks to demonstrate effective and sustainable governance structures since the financial crisis in 2008 through new regulations, changes to rating systems, and additional issuances of supervisory guidance. However, despite enhancement efforts, regulatory feedback continues to indicate that banks have not done enough to evaluate the effectiveness of their governance structures and the impact these structures have on the bank’s operations, regulatory standing, operationalization of risk management framework, and promotion of culture across the firm.
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The Federal Reserve Board issued proposed guidance outlining supervisory expectations for senior management, business line management, and independent risk management and controls in the form of principles. The guidance is generally consistent with a high-level preview of expectations provided in the August 2017 proposal to establish a new rating system for large financial institutions.
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As an expert in the field of banking regulations and operational resilience, I bring a wealth of knowledge and experience in navigating the complexities of evolving regulatory landscapes. My deep understanding of market events and the dynamic nature of the financial industry positions me to provide valuable insights and strategies for businesses looking to stay ahead in the current regulatory environment.
Now, let's delve into the concepts and key information mentioned in the provided article:
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Bank Regulation Evolution: The article emphasizes the ongoing evolution of bank regulations, indicating a dynamic and changing regulatory landscape. This suggests that businesses operating in the financial sector need to stay vigilant and adaptable to meet evolving regulatory requirements.
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Near-Term Actions for Businesses: Businesses are advised to take actions in the near term to position themselves effectively. The term "near term" implies a sense of urgency, highlighting the importance of proactive measures in response to recent lessons learned from market events.
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Expected Regulatory Scrutiny: The article suggests that regulatory scrutiny is expected to increase, particularly focusing on the stability of deposit funding and interest rate risk management. This implies that regulatory authorities are likely to closely monitor and assess these aspects of banks' operations.
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Competitive Advantage and Growth: The article posits that despite increased regulatory scrutiny, measures can be taken by banks to gain a competitive advantage, drive growth, and increase profitability. This indicates that strategic and compliant actions can lead to positive outcomes for banks.
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Protection from Losses and Risks: Businesses are encouraged to not only drive growth but also to protect themselves and their assets from potential losses and risks. This dual emphasis on growth and risk management highlights the balancing act that banks need to perform in the current regulatory climate.
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Recent Developments: The article references specific recent developments, such as the Federal banking agencies proposing new resolution planning requirements in September 2023. These proposals likely entail changes in minimum long-term debt for large banking organizations and resolution planning.
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Basel III Reforms: Mention is made of the US Basel III Final Reforms released by federal banking regulators on July 27, 2023. These reforms are significant and may have implications for capital requirements and risk management practices in the banking sector.
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Reports on Bank Failures: Reports published by the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation on April 28, regarding specific risk and supervisory issues leading to significant bank failures in March, indicate a focus on post-failure analysis and lessons learned.
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Challenges and Questions: The article raises questions about the adequacy of regulatory frameworks and whether challenges related to banks deemed "too big to fail" have been effectively addressed. This reflects a critical evaluation of the current state of regulatory measures.
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Legal Entity and Booking Model Optimization: In April 2023, the stability of the banking system faced challenges related to interest rate risk management and liquidity mismatches. The article suggests that optimization of legal entity and booking models is crucial during times of distress.
These key concepts illustrate the multifaceted nature of the challenges and opportunities facing banks in the evolving regulatory landscape, emphasizing the need for strategic planning, compliance, and adaptability.
