In a recent opinion article published in Bloomberg, journalist Paul Davies explains why there appears to be a global shift in the focus of those looking to improve financial stability from increasing capital requirements to ensuring effective banking supervision and oversight.
"The 16th anniversary of the collapse of Lehman Brothers has been marked by regulators signaling that the era of toughening up capital rules is over," Davies writes. “The strength of banks and standards of safety have been significantly bolstered since 2008. From now on, what matters is that supervision is well-funded and rigorous so that none of this is undermined or chipped away in the years ahead.”
Last week, US regulators announced that they were significantly scaling back their "basel endgame" capital proposal following fierce opposition from industry participants, advocacy groups, and legislators. Many of their global counterparts, including those in the UK and the EU, have also implemented or are poised to implement capital standards well below prior expectations. Of course, this backtracking does not negate the work done over the past decade-and-a-half to improve risk assessments and shore up balance sheets.
"In the world as it is, at the end of a cycle of adding to the prudential buttresses, the role of supervision becomes much more vital," Davies argues. "Unfortunately, there have been signs that supervision is already a weak point in the system." One need only look to the failure of Silicon Valley Bank in 2023, and the imposion of Credit Suisse shortly thereafter, for evidence of the consequences of deficient oversight.
"Proper, regular scrutiny of banks is hard and costly," Davies concludes. "It requires good data and well-trained, knowledgeable staff who are paid well enough to not be regularly poached by the industry they are overseeing. And if it works, the sole thing most people will notice about it, unfortunately, is the cost. But now that the post-2008 capital rules are all (mostly) finally settled, supervision is where the money and effort must be directed for the decades ahead."
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