BCBS Considers Regulatory and Supervisory Lessons Learnt from 2023 Bank Failures

In a new report, the Basel Committee on Banking Supervision ("BCBS") assessed "the causes of the banking turmoil [that started in March 2023], the regulatory and
supervisory responses, and the initial lessons learnt."

BCBS identified key risks and vulnerabilities, focusing on:

1. Bank Risk Management Practices and Governance. BCBS stated that the banking failures revealed significant shortcomings in basic risk management, including as to interest rate risk, liquidity risk and concentration risk. BCBS highlighted numerous failures including (i) a "failure to appreciate" the interrelationships between various risks, (ii) that some banks had unsustainable business models driven by a focus on short-term profitability, (iii) poor risk culture and (iv) inadequate responses to supervisory feedback.
2. Supervisory Effectiveness. BCBS stated that the failures highlighted the importance of effective supervision in order to "actively identify weaknesses" and "to take and enforce prompt actions."
3. Regulatory Standards. BCBS concluded that the Basel III reforms "implemented to date helped shield the global banking system from a more severe banking crisis." BCBS said that the turmoil underscored the importance of (i) "full and consistent implementation of Basel standards;" (ii) the "calibration of global standards for internationally active banks," (iii) "a balanced approach between Pillar 1 regulation and Pillar 2 supervision," (iv) a regulatory approach that recognizes the risks posed by non-internationally active banks to cross-border financial stability, including through indirect contagion channels, and (v) a regulatory approach that is proportionate to a bank’s risk profile and systemic importance.

BCBS said it would follow-up with initiatives based on these findings.