In a speech delivered at the European Banking Federation's International Banking Summit in Brussels earlier this month, Agustín Carstens, General Manager of the Bank for International Settlements (BIS), called for more effective banking supervision to prevent future banking crises.
Following recent bank failures, many have pointed fingers at rapid interest rate hikes, falling bond prices, and flighty depositors. However, Carstens contended that the leading cause was the failure of directors and senior managers to fulfill their responsibilities. Business models were poor, risk management procedures were woefully inadequate, and governance was lacking.
Supervision also plays a crucial role in identifying and addressing vulnerabilities through assessments, onsite inspections, stress tests, and dialogue, Carstens argued. "Banking supervision needs to up its game," he said. “It needs to identify weaknesses at an early stage and act forcefully to ensure that banks address them.”
Early and forceful action is essential, given the speed of bank runs amplified by social media and technology. To carry out their responsibilities effectively, Carstens asserts, supervisors will "need to have operational independence, strengthen their forward-looking culture and adopt a more intrusive stance." And innovative technology, such as big data, artificial intelligence, and machine learning, can enhance supervisory effectiveness and efficiency by automating repetitive tasks and allocating resources more effectively.
"[B]anking supervision needs to step up to ensure the safety and soundness of financial institutions under different macro-financial scenarios in the new technological environment," Carstens concluded. “It is essential, in that regard, that supervisors are sufficiently forward-looking and intrusive. With sufficient resources and the aid of technology, supervisors will be able to identify more vulnerabilities at an early stage and to act on them before problems become too large and complex to handle.”
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