Banking Industry Addresses Challenges with Liquidity, Risk Management, and Regulatory Reforms
Capital requirements, stress testing, credit risk, liquidity, and Basel III continue to surface as key themes in the regulatory landscape. Regulatory authorities and central banks are taking proactive steps to address these concerns and ensure financial stability.
Here’s the latest.
Capital Requirements & Liquidity Focus
Regulatory bodies, including the OCC, Federal Reserve, and FDIC, have proposed an overhaul of capital requirements for large banks. The proposed revisions aim to:
- Streamline risk-based calculations
- Enhance capital adequacy assessments
- Align with Basel III
Additionally the “Interagency Policy Statement on Funding and Liquidity Risk Management” received an addendum. The addendum highlights the importance of contingency funding plans to bolster liquidity in times of stress.
OCC’s Risk Perspective and Climate Resilience
The OCC’s latest Semiannual Risk Perspective underscores the significance of robust stress testing. The report also emphasizes the need for improved interest rate risk modeling, and enhanced climate-related risk management strategies. Integration of climate risk into models and risk management frameworks has been progressing, but there’s still room for improvement.
Basel III’s Importance for Banking Stability
FDIC Chairman Gruenberg emphasizes the Basel III “endgame” to safeguard the stability of the U.S. banking system and economy. Basel III introduces standardized approaches for credit and market risk, bolstering the industry’s resilience and risk management practices.
Gruenberg advocates for combining robust risk-based capital requirements with lowered leverage capital standards. Gruenberg sees finalizing Basel III as an opportunity to enhance the financial system’s ability to weather diverse economic conditions.
Federal Reserve’s Regulatory Outlook
Federal Reserve Board members have delivered a series of speeches highlighting the necessity of a responsive and responsible regulatory framework. Fed Governor Bowman emphasizes risk-based supervision, tailored regulation, and transparent evaluation to ensure a secure and competitive banking landscape. Fed Chair Powell emphasizes the importance of resilience in the face of economic challenges. Lastly, Vice Chair for Supervision, Michael S. Barr, outlines proposals to update capital requirements and improve resilience against emerging risks.
Stress Test Resilience & Capital Requirements
The Federal Reserve Board’s annual stress test results demonstrate the resilience of large banks. All 23 banks tested maintained capital levels above minimum requirements despite significant hypothetical losses.
This test, which incorporates severe economic downturn scenarios, assesses a bank’s ability to withstand financial market shocks and continue lending. The stress test outcomes directly impact capital requirements, ensuring banks hold sufficient capital to navigate adverse economic conditions.
Enforcement Actions and Risk Management
The Federal Reserve issued enforcement actions against Deutsche Bank AG and its affiliates, focusing on risk management and control practices. The actions include enhancements to data management, model risk governance, and liquidity risk management, aimed at improving overall risk control. These measures emphasize compliance with regulatory reporting requirements and highlight the need for robust risk management practices.
Addressing Global Regulatory Challenges
NCUA Chairman Todd M. Harper’s recent speeches underscore the importance of preparedness in the face of economic stress. He urges vigilance in monitoring credit risk, cybersecurity, and emerging technologies.
FCA’s Review of Asset Managers’ Liquidity Management
The Financial Conduct Authority’s review of liquidity management in UK asset management firms identifies gaps in risk management processes. While some firms exhibit high standards of liquidity management, disparities exist in compliance with regulatory standards and depth of expertise. The review underscores the importance of focusing on liquidity risk to protect investors and ensure sound financial practices.
Enhancing Model Management & Governance
Finance Monthly dives into The Bank of England’s initiation of an external review of its forecasting models. Amid criticism for failing to predict inflation, this highlights the importance of good model management. Advances in technology necessitate structured approaches with proper governance, explainable models, and effective risk mitigation.
This ties directly into the PRA’s new CP6/22 model risk regulation to enhance model identification, risk classification, and governance.
Tech Expertise Gap in Banking Leadership
A recent Accenture report covered by CIODive reveals a shortage of technology expertise among bank board members. Despite significant investments in technology, only a small fraction possess tech knowledge. Accenture emphasizes the importance of diverse technology voices in boardrooms for informed decision-making.
Navigating Generative AI & Model Governance
A recent AutoFinanceNews article examines the rapidly growing adoption of generative AI and LLMs, and the risks and opportunities it poses. While LLMs offer exciting potential, concerns of biases demand cautious governance. Organizations must follow established model governance standards (SR 11-7, etc) and prioritize transparency, validation, and compliance to ensure responsible use.
Prominent Scientist Faces Data Manipulation Allegations
The NYTimes examines recent accusations against behavioral scientist Francesca Gino of data manipulation (Excel file), raising concerns about research integrity. Accusations center on a 2012 study and subsequent revelations of fabricated results. The allegations prompted a broader evaluation of Gino’s contributions to the field, highlighting the need for rigorous research practices.
Innovating In-Game Data Management with Excel
Polygon covers the announcement of an official add-in for Microsoft Excel for the video game, Eve Online. The game, often referred to as “spreadsheets in space,” now allows players to import their data into Excel. This allows players to calculate manufacturing profits, analyze skill points distribution, and more.
This begs the question— do gamers now need spreadsheet risk management programs?
