Webinar - Strategic Initiatives in the Wake Of Market Stress

In light of recent market stress events and bank failures, it is crucial for financial institutions to reflect, analyze, and strengthen their operations. We had the opportunity to speak with industry experts Dharam Singla from ICICI Bank and Lax Seshan from State Bank of India's UK operations to gain valuable insights on the topic.

During the webinar, we focused on important areas for banks, including governance systems and controls, personnel and succession planning, regulatory agility and effectiveness, and diversification of funding and concentration risk. By addressing these areas, banks can enhance their resilience, mitigate risks, and navigate future challenges more effectively.

Governance Systems and Controls:

One crucial aspect to consider when examining the failures is the role of governance systems and controls. While external regulatory guidelines are important, it is essential to go beyond mere compliance. Dharam Singla emphasized the significance of an internal framework that covers liquidity management, interest rate, and capital risk. He stressed that the board and senior management are responsible for such a framework, ensuring that proper checks and balances are in place to prevent excessive risk-taking.

Personnel and Succession Planning:

The failures at Silicon Valley Bank also highlighted internal mismanagement, particularly in terms of personnel and succession planning. Lax Seshan pointed out the lack of qualified personnel in risk management positions and emphasized the importance of having experienced individuals driving the business. He also expressed concerns about remuneration and incentive policies that may prioritize short-term profits at the expense of sound risk management practices. Independent board and remuneration committees are vital for challenging management decisions and ensuring that incentives align with long-term stability.

Regulatory Agility and Effectiveness:

Regulatory bodies play a crucial role in maintaining stability in the banking industry. However, the events at Silicon Valley Bank underscored the challenges faced by regulators in responding quickly enough to evolving risks. The webinar moderator raised the question of whether regulatory authorities have the agility and authority necessary to effectively prevent such failures. Dharam suggested that while regulators provide warnings, it ultimately falls upon bank leadership to take them seriously and develop robust internal frameworks as the first line of defense.

Diversification of Funding and Concentration Risk:

One significant factor contributing to the collapse of Silicon Valley Bank was the lack of diversification in funding and the associated concentration risk. Lax Seshan pointed out that a large majority of deposits at the bank came from a small customer segment, with less than 10% being insured. This lack of diversification left the bank vulnerable to bank runs and increased the risk of systemic failure. It becomes evident that a well-diversified funding base provides stability and resilience during turbulent times.

Key Takeaways:

The recent failures of several banks serve as stark reminders of the importance of robust governance systems, effective risk management, qualified personnel, and diversified funding. These events highlight the need for banks to look beyond regulatory compliance and focus on building strong internal frameworks. By prioritizing risk management, aligning incentives, and embracing diversification, banks can enhance their resilience and navigate future market stress events.

As the financial industry continues to evolve, it is crucial for banks and regulatory bodies alike to learn from past failures and adapt their practices accordingly. By doing so, they can work towards maintaining stability, building trust, and safeguarding the financial system for the benefit of all stakeholders.