How will regional and global regulators respond?
The perceived drivers of the recent failures and market stress are reshaping supervisory and regulatory priorities. In the near term, the regulatory focus is likely to be on liquidity risk management, unrealized losses and business model vulnerabilities, particularly where there are sector concentrations.
Given the recent banking failures were due to firm-specific vulnerabilities, tailoring existing rules is more likely than an acute global response. In the US, rules for mid-sized banks may be revised, especially in relation to aspects of liquidity coverage ratio, the role of non-convertible capital instruments, the exclusion of certain asset classes from leverage requirements, risk capture and supervisory stress testing.
We believe that the global supervisory response will be limited to enhancements made to the current rules in order to ensure full compliance, especially where there are gaps to be remediated by some institutions.
Looking ahead, the focus will be on a broader set of drivers and capabilities, including:
- Balance sheet and capital management
- Recovery and resolution planning
- Crisis management and remediation
Considerations for banks
Banks need to understand and manage any new risks to capital and liquidity, and revisit their risk tolerance and portfolio strategies accordingly. Firms should also seek opportunities to bolster governance and oversight, strategic communications and crisis management to prepare for and respond to rapidly emerging market events. Priority focus areas include: