Quarterly update on financial services regulatory developments

Recent bank failures in the US and Switzerland and the turmoil that has followed have reignited debate around banking regulation. Regulators across jurisdictions are looking closely at any risk failings and the regulatory weak spots that contributed to the bank failures and lessons from the resolution efforts that have been made. Global regulators are reported to have discussed prudential standards that respond to heightened financial and economic risks. At the same time, the world is navigating ongoing headwinds, such as high inflation, lower growth and geopolitical tensions.

This quarterly update highlights key changes in supervisory priorities across jurisdictions in 1Q23 that may lead to increased regulatory requirements for FIs.

•      Global:

•      International bodies announced measures to identify implications and lessons learned from recent bank failures. Under discussion are the calibration and mechanics of countercyclical capital buffers, additional global macroprudential measures to mitigate risks to banks from interconnections with non-banks and a potential need for global principles on loan-to-value (LTV) and debt-to-income (DTI) type limits. In addition, the importance to implement agreed Basel III reforms in a full, timely and consistent manner and their application to internationally active banks has been highlighted in multiple jurisdictions, whereby the Basel Committee on Banking Supervision recognizes that, depending on local circumstances, it might be appropriate to adopt a proportionate implementation of Basel III for non-internationally active banks.

•      The Financial Stability Board (FSB) plans to develop and run a global bank stress test and address consequences of shifts in the macroeconomic and interest rate environment. Moreover, FSB members will review lessons to be learned from recent bank failures and focus on vulnerabilities, such as elevated debt levels, business models based on the presumption of low and stable interest rates, stretched asset valuations, and the combination of leverage and liquidity mismatches in non-bank financial intermediation (NBFI).

•      IOSCO’s work program 2023-2024 aims to enhance investor protection, maintain efficient, fair, and transparent markets, and reduce systemic risk. In addition, IOSCO called on regulators to address the impact of technological elements, such as social media, on retail trading.

•      Meanwhile, the International Monetary Fund (IMF) called on regulators to tackle risks to financial stability and recommends to: 1) Monitor interactions between geopolitical risks and more traditional ones related to credit, interest rate, market, liquidity, and operations; 2) Adopt a systematic approach for stress testing and scenario analysis to assess and quantify transmission channels of geopolitical shocks to financial institutions; 3) Strengthen crisis preparedness; 4) Set up mutual assistance agreements between countries (e.g., regional safety nets); 5) Promote common financial regulations across countries.

•         North America:

•      Several US authorities, such as the US Securities and Exchange Commission, the Federal Reserve Bank (Fed), the Federal Deposit Insurance Corporation (FDIC) and the Justice Department are investigating the recent US bank failures. An independent examination is expected, too. Meanwhile, the FDIC is in the process of selling securities portfolios retained from the failed US banks.

•      As an immediate response the US Congress introduced the Social Media Bank Run Act, which would require the Financial Stability Council (FSOC) to monitor social media platforms for indicators of a bank run.

•      In addition, US President Biden urged regulators to: 1) Reinstate rules for banks with assets between US$100b and US$250b (incl.: liquidity requirements, enhanced liquidity stress testing, annual capital stress tests, capital requirements and resolution plans); 2) Ensure strong supervision, 3) Expand long-term debt requirements to a broader range of banks; and 4) Ensure costs of replenishing the Deposit Insurance Fund are not borne by community banks.

•      The Fed and the FDIC have indicated to: Identify implications and lessons learned from recent events, enhance bank stress tests, implement Basel III reforms, propose a long-term debt requirement for large non G-SIBs, explore changes to liquidity rules, analyze effects of new technologies and emerging risks, ensure supervisors have enforcement tools, hold the management of failed banks accountable for losses and misconduct in management, review resolution plan requirements and prudential regulation for banks with assets over US$100b, and review the deposit insurance system.

•      Europe:

•      In common with many regulators worldwide European Union (EU) and UK regulators have expressed confidence in the banking sector being sufficiently well capitalized in their jurisdictions. Though volatility in EU/EEA banks’ equity and debt has been strongly affected by the recent bank turmoil direct exposures of EU and EEA banks towards the failed banks were limited. Yet, the European Bank Authority (EBA) plans to examine what recent bank failures mean for supervision, prudential regulation, deposit insurance and bank crisis management in the EU. It’s 2023 EU-wide stress test was launched in January 2023 and assesses the resilience of EU banks with a much stronger focus on mid-sized banks and credit risk exposure by sector, results are expected at the end of July 2023. EBA is exploring policies to ensure appropriate management of interest rate and liquidity risks while preserving financial stability and calls for the implementation of Basel III, the completion of the anti-money laundering (AML) package and Capital Market Union, a strengthened crisis management framework and a common European Deposit Insurance Scheme (i.e., EDIS, the third pillar of the banking union). The European Commission (EC) adopted a proposal to further strengthen the EU's existing bank crisis management and deposit insurance (CMDI) framework, with a focus on medium-sized and smaller banks. It will enable authorities to organize the orderly market exit for a failing bank of any size and business model, with a broad range of tools (e.g., facilitate the use of industry-funded safety nets to shield depositors in banking crises, such as by transferring them from an ailing bank to a healthy one). We also understand joint supervision teams between the ECB and member state central banks have been making enquiries about exposures between institutions.

•      Prior to the recent bank failures, UK regulators consulted on a so-called strong and simple framework consisting of a series of layered prudential regimes, with requirements expanding and becoming more sophisticated as the size or complexity of firms increase. In addition, the Bank of England is considering improvements to its approach to depositor pay-outs for smaller banks which do not have eligible liabilities, and is focusing on the speed of pay-outs. It also plans to conduct a system wide stress exercise involving banks and non-banks. Non-bank financial institutions (NBFIs) could emerge to a risk to financial stability, which is why UK’s Financial Policy Committee (FPC) plans to enhance the resilience of NBFIs. FPC is also monitoring US events and the potential impact on UK banks and financial stability.

•      The Italian Prime Minister’s party proposed a bill in the lower house of parliament to split retail and investment banks. If approved, banks would have 12 months to reorganize and choose between retail and investment activities. So far this does not seem to have made modest progress.

•         Asia-Pacific:

•      Regulators in Singapore, Hong Kong also consider their banking sectors well capitalized and see no further regulatory action required at the moment, but have enhanced the monitoring of their domestic financial systems and international developments.

•      Australia's regulator plans to focus on concentration risk in deposits, high exposure of banks to a particular industry or demographic, cyber preparedness and resilience. It aims to also consider events outside financial services (e.g., fluctuations in commodity prices, sharper movements in interest rates and a higher number of extreme weather events).

The views reflected in this article are the author’s and do not necessarily reflect the views of the global EY organization or its member firms.