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Chris Woolard’s Insights 1 Year After 2023’s Banking Turmoil

Banking Insights | March 7, 2024

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Reflecting on the Banking Sector's Resilience and Regulatory Evolution

A year after the Spring 2023 banking turmoil, triggered by the failures of major institutions like Credit Suisse and three US regional banks has set the stage for a significant supervisory shift. With the Basel 3 Reforms at the forefront, financial institutions worldwide are implementing stronger capitalization and more rigorous risk management practices to ensure stability and resilience of the global banking system.  In this LinkedIn pulse article, Christopher Woolard, Partner at EY, EMEIA lead financial services regulation, Chair EY Global Regulatory Network, sheds light on regulatory trends that every financial institution should be aware of.

Select Quotes and What It Means for Fintechs and Investors

"Almost a year has passed since the financial markets’ volatility was triggered by the failures of Credit Suisse and three US regional banks."

This quote highlights the interconnectedness of global financial markets and the domino effect that the failure of significant institutions can have. For fintechs, it underscores the importance of robust risk management and the need for a contingency plan. Investors should be aware of the systemic risks and consider the stability of the financial institutions within their portfolios.

"Implementation of the final part of the Basel framework, Basel 3 Reforms, updated in light of the 2007–08 global financial crisis, will be key to ensuring banks are well capitalized."

The Basel 3 Reforms represent a comprehensive set of regulatory standards designed to strengthen the regulation, supervision, and risk management within the banking sector. For fintechs, especially those in lending, payments, and regulatory technology (RegTech), this quote underscores the importance of aligning with or facilitating compliance with these enhanced capital requirements.

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It signals a need for innovative solutions that can help banks meet these standards efficiently. For investors, the implementation of Basel 3 Reforms is a critical factor in assessing the risk profile and stability of banks. Investments in banks that are proactive in adopting these reforms may be seen as more secure, given their strengthened capital positions and reduced risk of failure. This focus is on capitalization to ensure financial institutions are more capable of withstanding future financial stresses.

"Supervisors are increasingly acting on previous warnings and action points asked of their supervised firms, closely monitoring banks’ efforts to remediate known risk management weaknesses."

This quote suggests a shift towards more proactive and stringent regulatory oversight. Fintechs should anticipate and prepare for increased scrutiny, particularly in areas of risk management and compliance. For investors, this could mean that banks and financial institutions are becoming safer investment options, albeit possibly facing higher compliance costs.

"The 2023 banking turmoil showed that central bank support is crucial during a bank run."

The role of central banks in providing liquidity support during crises is crucial. Fintechs, especially those in the payments and lending spaces, should consider the implications of central bank policies on their operations and liquidity management strategies.  Investors might see central bank readiness to support the banking sector as a safety net that mitigates some of the risks associated with bank runs.

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"The European Banking Authority (EBA) Chair Campa echoed the growing regulatory concerns of the linkages between banks and the non-banking financial institutions (NBFIs), including hedge funds, private equity, and cryptocurrencies."

This highlights the growing importance of NBFIs and the crypto sector in the broader financial ecosystem. Fintechs operating in or with these sectors should be mindful of the evolving regulatory landscape and its implications for their business models. Investors should consider the potential for regulatory changes to impact the valuation and risk profile of their investments in these areas.

Why It Matters

The events of Spring 2023 serve as a crucial reminder of the interconnectedness of global financial systems and the importance of robust regulatory frameworks. The focus on implementing Basel 3 Reforms and enhancing liquidity risk management practices is to safeguard financial system against future crises.

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Understanding these events helps stakeholders prepare for future challenges, ensuring a more resilience banking sector against unforeseen crises.


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