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Europe has so far generally applauded itself for preventing further banking sector contagion in the wake of Silicon Valley Bank (SVB), Silvergate Bank, and Signature Bank collapses in the United States, with the exception of Credit Suisse's demise.
There has been a lot of praise for the robustness of the financial services regulatory frameworks in Europe and the United Kingdom, as well as for the quick, coordinated, and decisive action taken to contain any further disaster, even though European banking stocks have shook in the wake of the crisis, with Germany's Deutsche Bank bearing the brunt last weekend.
According to Daniel Seely, a cryptocurrency expert and financial regulatory associate at law firm Freeths, "This was perhaps an unexpected stress test for the market, but one that may potentially serve to benefit the sector's confidence." Seely also gave the UK appreciation. The willingness of the government, the Bank of England, and the Financial Conduct Authority to permit HSBC to swiftly purchase SVB's U.K. arm, stopping a rescue financed by taxpayers money.
According to Seely, the incident would force regulators to reconsider whether the current measures in place to stop bank sector crises are sufficient.
He suggested that, as an example, European financial authorities may start reviewing the regulations governing minimum capital requirements—that is, the amount of money a bank or other regulated company must have on hand to cover liabilities.
Additionally, he said, regulators are likely to look at whether there should be more thorough reviews and audits of banks' general strategies and customer portfolios to see if they are appropriately diversified against risk or if — as with SVB — they are hedged in such a way that they are overly exposed to one specific industry or customer base, placing them at risk of failure.
For some banks with risks associated with asset concentration or depositor concentration, Indraneel Basu-Majumdar, senior financial services solicitor at law firm Harper James, anticipates that the regulations governing the liquidity coverage ratio will be examined and possibly tightened.
In particular in an area like the tech sector, which is "famously unpredictable and moves at lightning speed," he said the collapse of SVB showed the inherent risks of banks and financial institutions "putting their eggs in one basket."
According to reports, approximately 50% of venture capital-backed technology companies in the United States and a comparable percentage in the United Kingdom bank with SVB.
According to experts, authorities in Europe and the United Kingdom are likely to take action to stop future concentrations—and potential exposure—as well as to assess whether current regulations need to be strengthened. The demise of Credit Suisse and the hurried takeover by rival UBS show that traditional banking is not exempt from problems.
Re-examination may also be done on the portions of the U.K.'s anticipated "Edinburgh Reforms" dealing with financial services that are intended to lessen compliance requirements in a post-Brexit scenario. Although the existing regulations have functioned as anticipated, Bank of England Governor Andrew Bailey stated in a Tuesday speech before the Treasury Committee of Parliament that he had not ruled out a review of liquidity coverage ratios and concentration risk.
Other possible topics for review include whether to modify the regulations governing the ringfencing of banks, which were loosened to permit HSBC's takeover, and to increase regulatory monitoring of management capability.
According to some experts, regulators' conventional beliefs about whether institutions can represent sectoral risks need to be challenged as well.
Vera Cherepanova, a partner at compliance and ethics consulting firm Studio Etica, asserted that it is now debatable if regulation should be concentrated primarily on large banks. The U.K. is comparable to the U.S. The amount of a bank's assets is a key factor in the EU supervisory approach; the greater the asset size, the greater the risk. She said, "Size is not always a good proxy for risk," though.
"SVB had a novel, very concentrated business model, working with venture capital firms, startups, and the tech sector," according to her. "To avoid a similar situation in future, banking oversight regulations need to evolve to reflect the changing tech and investment environment and the unique risk profiles of banks like SVB."
The president of network analytics company FNA, Phillip Straley, concurred that smaller banks with assets under $250 billion require more supervision. In order to predict what it would take to break a bank in the future, he noted that regulators should impose real-time stress testing across the internal rate of return, which is used to calculate the profitability of possible investments, and the level of liquidity risk.
By fLEXI tEAM