Some industry executives have stated in recent weeks that they believe the worst of the recent banking turmoil may be behind us, though some banks will look to rebalance their holdings and many will reexamine their business and risk models.1 Investors, however, continue to struggle with a “crisis of confidence” in the sector.2 And polls suggest that, in the US, only 10% of people have confidence in the banking system or government’s effective supervision of the industry.3
Such confidence is, of course, crucial. “Liquidity buffers will create a cushion,” Governor of the Sveriges Riksbank, Stefan Ingves, said in a late 2009 speech.4 “However, the root of a liquidity crunch is a lack of confidence.” No capital cushion is large enough to survive a loss of confidence in a financial institution. “There is simply no reasonable level of minimum capital and liquidity that can make a bank viable if it has an unsustainable business model or poor governance,” General Manager of the Bank for International Settlements Agustín Carstens emphasized in a June 1st speech.5 “The events in March this year had echoes of 2008,” Chair of the Supervisory Board of the ECB Andrea Enria said that same day.6 “If the recent turmoil teaches us one supervisory lesson above all, it is the importance of ensuring banks have sound internal governance and risk management,” he added. “As a general rule, well-run banks — in other words, banks with strong risk management and governance — don’t fail.”
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