Exploring the Global Impact of the 2023 US Banking Crisis

It is around a year since Silicon Valley Bank, Signature Bank, and First Republic failed, and while its effects were by no means as far reaching as those in the global financial crisis over 15 years ago, it has sent substantial repercussions throughout the industry, its regulators, and governing bodies.

Here, we take a look at some of the global reactions and give recommendations on what individual banks can do to protect themselves from potential contagion.

APRA: Clipping the Butterfly’s Wings

Reverberations were felt as far afield as Australia, where APRA Chair John Lonsdale[1] likened the potential damage of the collapse to the ‘butterfly effect.’ Lonsdale stated, “Could the failure of a mid-size Californian bank specialising in servicing the fintech and start-up sectors impact the stability of the banking system in Australia 12,000 kilometres away?”. While local Australian banks came through the crisis unscathed, it nonetheless triggered APRA to reinforce its requirements for Interest Rate Risk in the Banking Book (IRRBB).

In December ‘23, the regulator announced revisions to Prudential Standard APS 117. Previously, the regulation required ‘significant financial institutions’ to have an appropriate risk management and governance framework to manage the impact of changing interest rates on their businesses. The December changes included a short consultation – ending in March – on some aspects of APS 117 which are also relevant to smaller banks. At the same time, APRA is consulting on changes[2] to Prudential Standard APS 210 Liquidity, Prudential Practice Guide APG 210 and Prudential Standard APS 111 Capital Adequacy to prevent potential contagion risk.

While the full extent of APRA’s reaction to the US banking collapses is not fully realised, all signs point to a proactive, steadfast, and cautious stance. One that is immune to banking lobbyists or political pressure persuading them otherwise. Which is in stark contrast to what is currently happening elsewhere in the world…

US: The Fed in Flux

A month after the US crisis, the Federal Reserve issued stringent Basel III ‘endgame’ rules which some warned could lead to capital hikes of up to 20% for some large banks. Unsurprisingly, these rules have been under intense scrutiny and political in-fighting since they were announced, with dissident voices claiming that having extra capital would not have saved SVB et al. [3]

At time of writing this article, the industry is still ruminating over Federal Reserve Chair Jerome Powell’s recent testimony[4] delivered to Congress, announcing that officials will be making ‘broad material changes’ to the proposed Basel III endgame rules.

EU: An Indirect Effect

Meanwhile, in the EU, the impending and wide-reaching Basel III rules on the horizon mean that no specific reactive action has been taken by regulators in response to the 2023 crisis. However, events in California will certainly serve as a cautionary backdrop for upcoming governance – a fact demonstrated by Andrea Enria, Chair of the Supervisory Board of the ECB who heralded ‘a new stage for European banking supervision’ at the Handelsblatt Annual Conference on Banking Supervision at the end of March 2023[5].

In this speech Enria also called out the importance and ‘persistent sluggishness’ of progression around ‘BCBS 239: Risk Data Aggregation and Reporting’ that was first issued in 2013. The ECB followed this with an announcement[6] that banks are expected to step up efforts and improve their capabilities in this area in a timely manner.

The link between the US crisis and the EU’s sharper focus on regulation like BCBS 239 is not explicit. However, it is clear that banks operating in the EU should be ready for more scrutiny because of what happened 12 months ago. In particular, it would be prudent for all banks in the region to work within BCBS 239’s principles of generating ‘aggregate risk data to meet a broad range of on-demand, ad hoc risk management reporting requests, including requests during stress/crisis situations and requests due to changing internal needs’ [7].

Charting Your Own Path

One year on, there is no doubt Silicon Valley Bank, Signature Bank, and First Republic has put strong risk management firmly back into the spotlight. As we have explored here, regulators have responded in very different ways, influenced by various factors.

While it goes without saying at a base level regulatory guidance must be followed and adhered to, but adopting an approach of simply waiting for yet more regulation to be debated and eventually passed comes with its own risks. Firms can also make their own decisions on arming themselves with the tools to manage and prevent risk. To survive any future crises and contagion, firms must always have a solid grasp of their position, regardless of what their regulator has asked for.

[1] APRA Chair John Lonsdale - Speech to AFR Banking Summit 2023 | APRA

[2] Proposed changes to liquidity and capital requirements for authorised deposit-taking institutions | APRA

[3] The Fed gets ratioed, bank capital edition (ft.com)

[4] Powell says "broad" overhaul coming for Basel bank capital proposal | Reuters

[5] A new stage for European banking supervision (europa.eu)

[6] ECB consults on Guide on effective risk data aggregation and risk reporting (europa.eu)

[7] Principles for effective risk data aggregation and risk reporting (bis.org)