How China can learn from the mistakes in US banking culture and oversight
- As China looks to reform its banking regulations, it can avoid US pitfalls, such as letting regional banks lend excessively to one sector or allowing skewed boards
- Importantly, the siren call of lobbying for looser banking rules and regulations must be ignored
The recent and still-reverberating regional banking troubles in the United States require a frank assessment of the failures and faults by many actors. Central bankers and supervisors in other jurisdictions could learn lessons from America’s mistakes, in matters related to bank culture, regulation and supervision.
On bank culture, a topic on which the Group of Thirty has opined repeatedly, the lessons are clear. A firm’s culture, demonstrated by the board and leadership, determines risk appetite. The culture signals to mangers what to do and how to do it.
The companies became too close to their customers. They adopted risk-taking inappropriate to their social and economic roles. When the easy money stopped, these banks faced dangers similar to those of their overleveraged and concentrated customers.
In America, the banks’ boards appear to have failed to oversee the management and rising risks. SVB’s management was rated “deficient’ by regulators the year before its collapse. The SVB board was dominated by venture capitalists of a particular risk-taking Silicon Valley mindset.
Moreover, SVB did not have a chief risk officer for eight months. Why was this critical leadership post left vacant at a time of stress? The failures in regional US banks underscore the central role that a strong and assertive board must play in ensuring bank stability.
If culture and leadership are crucial points of possible failure, so too are regulatory errors.
In the US, bank lobbyists opened up a regulatory gap in 2018, supported by then US president Donald Trump and his appointees, which helped cause the current financial volatility. We saw a weakening of Dodd-Frank rules on capital, supervision and risk-taking for mid-sized banks.
These changes allowed SVB and Signature Bank to operate in ways that put the companies at risk and weakened necessary oversight.
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Silicon Valley Bank collapse stuns tech firms around the world, global operations dismantled
Banking giants that are too big to fail are not the only points of danger. Failures in smaller institutions can spread and infect other companies and markets. Indeed, this is often how wider banking crises start. Make sure that regulatory oversight of regionally significant firms is maintained, not weakened.
Supervisory lessons are also evident. In the US, regional Federal Reserve banks dropped the ball. SVB’s CEO was on the board of the San Francisco Federal Reserve. This is a potential conflict of interest.
It is time to stop this practice. We should remember the late Paul Volcker’s maxim that a central banker is a supervisor, not a bankers’ friend. The two cannot cohabit.
The Federal Reserve Board also failed to ensure that monetary policy staff understood the role and challenges of their supervisory colleagues, and vice versa. The spillovers of the former on the latter are real, and each side must know the effects of what the other is planning and executing.
As a result, the US central bank did not test for interest rate risks – precisely the risk both failed banks confronted as rates rose. The banks should have known the Fed was going to raise rates swiftly to deal with high inflation. For SVB and Signature Bank, this meant disaster.
When SVB’s profits dived and panic struck, it was transmitted rapidly via social media; digital banking accelerated the collapse and SVB’s depositors tried to withdraw practically all deposits in just two days.
As social media fuel bank runs, good communication is never more vital
Their monetary staff must understand supervisory teams’ pressures, and both sides must work to ensure they test and act fast when risks of failure arise.
China’s regulators should look and learn – on culture and conduct; on firm leadership and board roles and composition; on regulatory rigour; on supervision, stress testing and monetary policy spillovers.
Chinese regulators can thus potentially avoid similar mistakes when – not if – banking crises occur at home.
William R. Rhodes is president and CEO of William R Rhodes Global Advisors LLC, and author of “Banker to the World”
Stuart P.M. Mackintosh is executive director of the Group of Thirty
