Lessons in Banking: What the Recent Failures Teach Us About Regulation and Risk Management

The Great Bank Shake-Up of March

March 2023 will be remembered as the month that sent ripples through the financial sector, as a trio of banks fell like dominoes, sending everyone from depositors to regulators into a frenzy. It all began with Silvergate Bank, which decided on March 8 that voluntary liquidation sounded better than a forced exit. Just days later, in a dramatic dance of decisions, California regulators pulled the plug on Silicon Valley Bank (SVB) on March 10, followed by the New York Department of Financial Services (NYDFS) shutting down Signature Bank on the 12th. Talk about a wild weekend!

What Went Wrong?

The rapid success turned sour for these institutions as they struggled with risk management—a topic that seemed to be lost in translation somewhere between board meetings and coffee breaks. The Fed’s review pointed out that SVB’s management was akin to a captain sailing a ship without checking the weather; they simply didn’t grasp the storm brewing on the horizon. For instance:

• It turns out that their risk assessments were as effective as using a colander to carry water.
• Despite a litany of risk warnings from CAMELS examinations in years prior, they kept making the same strategic blunders.

Regulatory Oversight: Too Little, Too Slow

Supervisors at the Fed and NYDFS also got a reality check. The reviews revealed a tendency to dawdle, caught in a web of convoluted validation processes, effectively hampering timely regulatory action. In short: “Let’s gather more evidence, shall we?” became their anthem. The NYDFS admitted that internal constraints significantly affected their capacity to adequately supervise—so it’s not just the banks that need a wake-up call!

Lessons For Future Regulations

With regulatory agencies facing scrutiny, something’s gotta give. By adopting a stricter supervisory stance, future banking crises might be avoided. The recent reports suggested:

• Supervisory policies need to be revamped to expedite the decision-making process.
• It might also help to have clearer guidelines when issues arise. But hey, who doesn’t love a good procedural labyrinth?

The Aftermath: What Comes Next?

As if one bank collapse wasn’t enough, the fallout continued with Credit Suisse being saved from the brink by UBS. Not wanting to be left out, First Republic Bank joined the party, with its stock plummeting in response to the mounting chaos. Shareholders’ faces must have looked like they’d just swallowed a lemon.

Final Thoughts

While the collapse of these banks was shocking, it also serves as a stark reminder of the importance of risk management in banking and the need for vigilant regulatory oversight. Maybe next time, banks will heed the advice of their mothers: “Don’t take unnecessary risks, darling, or it’ll cost you!” As we brace ourselves for the future, here’s hoping the lessons learned will steer us clear of repeating history.