21 February 2024

SRB's Laboureix: Building a stronger crisis framework in a financial world always in motion - Columbia University

Banks remain private enterprises so, even if tightly regulated and of critical importance, they should be allowed to fail. Since no systemic bank should be considered “too big to fail”..

Today, I will share my thoughts on the initial lessons learnt after almost one year from the 2023 bank failures in the US and Switzerland, and the new risks that we may be facing.

As here in America you know more than anybody, a well- functioning financial system, balancing healthy risk-taking with the necessary prudence, enables stable growth through an efficient allocation of resources, better risk diversification and support to innovation. 

Bank prudential regulation and supervision aim at minimising the chances of liquidity and solvency crises. [From that perspective, and as stressed by Michael, the finalisation of Basel III is a key element of global prudential regulation and it should be implemented in all jurisdictions.] However, banks remain private enterprises so, even if tightly regulated and of critical importance, they should be allowed to fail. Since no systemic bank should be considered “too big to fail” (this phrase meaning governments and taxpayers were obliged to step in to avoid systemic banks to fail, in particular in 2008), when a failure happens despite all the prudential regulation and supervision, resolution authorities are there to safeguard financial stability, minimising disruptions to the real economy and shielding taxpayers from losses. 

To some extent, the fact that EU banks were not fundamentally affected by the March 2023 events confirms that the reforms put in place on capital, liquidity and loss absorbency rules after the great financial crisis - applied to any type of banks, large and small, although in a proportionate way - are an important safeguard for financial stability. However, we should not be complacent. The last crisis reminded us that a bank failure could occur swiftly and authorities should be ready to act. 

In Europe, financial stability is closely tied to a better functioning and greater integration of our internal market. By removing fragmentation, both Banking Union and Capital Markets Union, the two landmark reforms that the Commission has set out to improve integrate our financial sector, offer the potential of significant economies of scale and increased competitiveness in the financial sector. Unfortunately, the finalisation of both projects has been substantially delayed. In particular, an agreement on how to complete the Banking Union has eluded European legislators for almost a decade.

Lessons learned

Last year, we witnessed the failure of three American regional banks, whose combined assets amounted to almost $550 billion, whereas in Switzerland we saw the demise of a G-SIB, which was in the end acquired by another G-SIB. 

The authorities stabilised the situation both in the US and Switzerland and protected financial stability with unprecedented measures implying also a support coming from public bodies. While no depositors suffered losses in the US, thanks to a “systemic risk exception” which permitted an unlimited coverage, shareholders and unsecured debtholders took a serious hit, in Switzerland shareholders of Credit Suisse were severely depleted and all the outstanding amounts of Additional Tier 1 instruments were wiped out. These events have prompted a range of policy questions about the adequacy of the prudential and supervisory frameworks and the credibility of the resolution regimes. 

Both the Basel Committee and Financial Stability Board reports, published in October 2023^[1], discuss some preliminary lessons from the bank failures. 

I will focus on the lessons learnt from a crisis management standpoint.

In terms of crisis management, to keep it simple, the review of the FSB concluded that, yes, the system worked but it also identified several implementation issues. ...

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