Tuesday,16 July 2024

Financial experts analyse US bank runs and regulatory mitigation strategies

5 min read

By Genivi Factao

The Future of Finance Summit 2023 set off at a lively pace with a deep dive into the US bank runs that rattled the banking industry in March, with panellists identifying the triggers and what regulators can do to mitigate future risks

Leaders in financial services covered issues on the differences between the financial systems in the US and UK, and the dramatic effects on the deposit industry arising from technology, artificial intelligence (AI), and shifting customer behaviour. The summit was held by The Asian Banker in Bangkok, Thailand, from 14 to 15 June.

Panellists included Howard Davies, chairman of the NatWest Group; Barney Frank, former congressman and chair of the US Congress House Financial Services Committee; Theo Priestley, global technology futurist and author of The Future Starts Now. The session was moderated by Gordian Gaeta who sits on the Future of Finance Summit Advisory Council, and Emmanuel Daniel, the founder of The Asian Banker.

The discussion revealed the difficulties and hazards that come with deposits, particularly during times of market turbulence.

Frank said: “What we are seeing today is the migration of technological innovation to deposits. We have a metaphor that we’ve always used called the ‘run on the banks’ that was literal. People ran down to the bank to take out their deposits.

“That doesn’t exist anymore. What we now have is a push button on the banks. You have a situation where with two pushes of your finger 24 hours a day, seven days a week, you can move deposits, and that was the major cause for Signature Bank. It exacerbated Silicon Valley Bank (SVB). It was a major cause for First Republic Bank. What you had was an irrational overreaction to the volatility of crypto that triggered this technologically supercharged deposit shifting.”

Frank was the co-author of the Dodd-Frank financial reform act of 2010, set out to resolve the issues arising from the 2008 crisis. He was also a director at Signature Bank from 2015.

Davies noted that the UK and US banking systems have similarities but important differences. Deposit protection is lower in the UK ($104,000) compared to the US ($250,000), but this gap is less significant considering the economies’ relative sizes. The treatment of interest-rate risk also varies. In the UK and Europe, it is integrated into the Basel Pillar 1 and Pillar 2 framework, while US regulators have not explicitly included it in their framework.

Davies is also chairman of the International Advisory Council, China Securities Regulatory Commission.

He added: “This difference in treatment of interest-rate risk is particularly relevant to Silicon Valley Bank, a bank that had a significant unhedged position on US treasuries. It is unlikely that a UK bank would have been allowed to take such a position. This distinction highlights the varying regulatory approaches and risk management practices in different jurisdictions.

“The concentration of risk that Silicon Valley Bank experienced in the high-tech sector would not be typical in the UK banking landscape. The UK regulators would not permit such a high degree of concentration risk on a single industry sector.”

He concluded by saying that understanding these nuances is crucial for financial institutions operating in different jurisdictions.

One of the main issues covered was the potential for decentralised finance (DeFi) to completely alter the deposit landscape. The panel highlighted DeFi’s capacity to offer constant liquidity and round-the-clock accessibility as evidence of its revolutionary power. This new paradigm offers banks new opportunities for expansion and a change in the conventional dynamics of cost of funding and profitability.  

Priestley, a recognised expert in the future of technology, pointed out that AI has long been incorporated into banking operations, particularly in credit-lending decisions and customer service via well-known voice assistants like Siri and Alexa. Priestley listed multiple years in a row as a one of the top 100 global technology influencers and thought leaders in fintech, IoT, AI, Web3, metaverse and blockchain.

Frank discussed the implications of cryptocurrencies for the banking industry, and the volatility and anxiety surrounding crypto assets. He described how panic over these assets resulted in deposit withdrawals, raising issues with liquidity and solvency for some institutions such as SVB.

He emphasised the significance of regulating and diminishing doubts around cryptocurrencies to reduce volatility, manage risks and safeguard the stability of the banking system. He also clarified the complex interplay between macroeconomic and macroprudential regulation needed to control interest rate swings. 

In conclusion, Davies offered that while there may not be any fundamental differences between the US and UK banking systems, both countries must exercise caution while the world undergoes rapid change.

Keywords: Future Of Finance Summit, Risk And Regulation, Financial Technology, Decentralise Finance, Deposits, Macroeconomic Stability, AI, Customer Behaviour, Profitability, Sustainability
Institutions: NatWest Group, US Congress House Financial Services Committee, Future Of Finance Summit Advisory Council, Silicon Valley Bank, Signature Bank, China Securities Regulatory Commission
People : Emmanuel Daniel, Howard Davies, Barney Frank, Theo Priestley, Gordian Gaeta
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