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The governor of the Bank of Spain, Pablo Hernández de Cos, had approved the invitation to the International Institute of Finance, the employers’ association of the big banks, chaired by the Spanish Ana Botín, to read the primer to the bankers. The fall of Silicon Valley Bank and Signature Bank and the Credit Suisse crisis are, first of all, a problem of mismanagement and managers will not be able to review the situation of their own entities. In addition, Cos has warned of the need for demanding supervision and has warned against the risk of forgetting the past.
under the motto The changing landscape of risk, Because he appeared this Wednesday together with the governor of the Bank of England, Andrew Bailey, at an event held in Washington in parallel to the spring meetings of the International Monetary Fund (IMF) and the World Bank. In these meetings, they have discussed how financial turmoil is complicating economic recovery, even though its expansive wave seems controlled.
This is how he has focused his intervention on these turbulences, which he has defined as the first real stress test since the great financial crisis. “It’s important to step back and ask what happened, why it happened and what this all means for banks, regulators and supervisors,” he said. According to the governor of the Bank of Spain, who is also president of the banking supervision commission of the Bank for International Settlements (BIS) in Basel, there is not a single cause, but he sees it likely that multiple factors have contributed and that it will take some time to have a full explanation. “We must not jump to conclusions, nor close any doors,” he said.
However, Cos has first pointed out to the bankers themselves: “We must start by asking ourselves why, in 2023, some banks have not complied with basic risk management and governance practices,” he said, qualifying that he does not believe it is a general pattern across the industry. “But, in times of stress, the financial chain is only as strong as its weakest link. Strong risk management and strong governance practices are the bread and butter of bank management. The boards of directors and management of banks should be primarily responsible for managing and supervising risks; These functions are not outsourced to supervisors. Going directly to discussing the regulatory and supervisory implications of the latest events is tantamount to forgiving banks for failing to meet their primary responsibilities, and similarly, shareholders for failing to exercise due diligence,” the governor said.
Federal Reserve Vice President for Supervision Michael Barr already said late last month that Silicon Valley Bank’s failure was “a textbook case of mismanagement,” though that has not assuaged criticism of regulatory missteps and supervision that many attribute to the central bank. US President Joe Biden has called for some reforms, but has actually abandoned the idea of banking reform pushed by his predecessor, Donald Trump, for which he does not have a majority in Congress. .
demanding supervision
Because he has also referred to the need to preserve demanding supervision, in the face of pressure to relax. “Supervisors must ask tough questions and take decisive action to ensure the safety and soundness of banks and save financial stability. These are public goods that benefit all of society. The privatization of the beneficiaries and the socialization of the extreme losses is not an acceptable result”, he said.
However, according to the governor, financial lobbies are strong and the temptation to forget history appears again and again, while “the rewards of the tough supervisory decisions necessary to avoid banking crises are rarely visible or clear.” ”. “The success of supervision is an orphan. That’s why it’s critical that we all welcome and support a supervisor’s ability to exercise judgment and tell a bank that its leverage or maturity transformation is too high, or that its business model is unsustainable, or that it needs adopt rapid and substantial measures to shore up risk management and governance failures”, he explained.
In regulatory matters, because it has made similar warnings. He has pointed out that pressures for looser regulation in the area of capital and liquidity are frequent and that the temptation to forget past episodes of financial crises is great. He has stressed that risks such as those that have caused the recent banking crises were correctly identified, but were later smoothed over during the rulemaking process. And he has asked to strictly apply the rules of Basel III.
“Recent events have further highlighted the importance of a resilient global banking system, underpinned by effective bank governance and risk management practices, strong regulatory standards, and strong supervision backed by proactive cross-border cooperation. It is vital that banks and supervisors remain attentive to the evolving outlook. The risks of inflation, high growth, lower growth and geopolitical tensions remain as relevant today as they were in early March. The full and consistent application of the pending Basel III rules remains essential to salvage the resilience of our banking system”, he concluded.
The governor of the Bank of Spain stressed at another event this Monday in Washington that the transmission of monetary policy is somewhat complicated because banks are being very slow when transferring market interest rates to their clients, especially retailers. . That slowness “could undermine the standard channel through which rising interest rates discourage savers from spending,” he said.
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