There were no supervision failures, but management. The Silicon Valley Bank and Credit Suisse crises have represented the first endogenous shock to the financial system since the Great Recession of 2008 and there is no single culprit for what has happened. There are always multiple factors that cause financial stress. Even so, the governor of the Bank of Spain, Pablo Hernández de Cos, points first to the governance of financial institutions.
"We have to start by asking why in 2023 some banks have not met basic risk management and supervisory standards. Strong risk management and sound governance practices are the bread and butter of banking. The advice Administration and management should be primarily responsible for risk management and supervision. These functions cannot be outsourced to supervisors", said Hernández de Cos during a speech at the Payments Bank as Chairman of the Banking Supervision Committee of Basel, entitled Banking starts with banks: Initial reflections on recent market stress episodes.
In this sense, the Governor of the Bank of Spain is clear that putting the regulatory and supervisory system into question would be equivalent to "forgiving the banks for not fulfilling their primary responsibilities and, likewise, the shareholders for not exercising due diligence due".
Hernández de Cos recalled that the Basel agreements explicitly stipulate what the roles of entities should be in day-to-day management. "Management is responsible for understanding the nature and level of risk the entity is assuming and how this relates to appropriate levels of capital. It is also responsible for ensuring that the formality and sophistication of risk management processes are appropriate to the light of the risk profile and the business plan". In his opinion, "compliance with these guidelines should not be a box-ticking exercise, but rather take the form of a deeply ingrained mindset at all levels of any bank"
As regards supervision, the Spanish central banker ensures that the degree of cross-border cooperation in supervision at the level of the Basel Committee, in response to recent events, has been effective. However, without opening the way to explicit self-criticism, Hernández de Cos has ensured that supervisors should not be afraid to ask difficult questions and take decisive measures to guarantee the safety and soundness of banks and safeguard financial stability.
"The privatization of bank profits and the socialization of extreme losses are not an acceptable outcome. Financial lobbies are strong and the temptation to 'growth drive' is powerful. At the same time, the rewards of tough investment decisions supervision necessary to avoid banking crises are rarely visible or clear. We never see the counterfactual: the success of supervision is an orphan", reasons Hernández de Cos. "That is why -he assures- it is fundamental that we all applaud and support the ability of a supervisor to exercise his judgment and tell a bank that its leverage or its maturity transformation are too high, or that its business model is unsustainable, or that You need to take quick and substantial steps to shore up your business."
In conclusion, Pablo Hernández de Cos has expressed satisfaction that the Basel III reforms have strengthened the resilience of the global banking system, since the total leverage of the banking system has been halved, from 30 to 15 times since 2011. At the same time, "banks' liquid asset holdings have more than doubled over this time period and now stand at €12.5 trillion. These reforms have helped contain the fallout from the recent banking tensions."
For all these reasons, Hernández de Cos recalled that the regulation standards set minimum criteria and that it is in the hands of the managers and the different actors in the system to do everything possible to ensure their implementation. Because, as he very well underlined during his speech, after each crisis "memory fades, complacency sets in and the fallacy appears that 'this time will be different'".
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