How to avoid the next crisis? Banks may have to hold more cash

By Anna Cooban, CNN

Regulators must learn “important lessons” from this year’s banking turmoil, the world’s top financial watchdog has said. Requiring banks to hold more cash to pay out depositors may be one of them.

Klaas Knot, chair of the Financial Stability Board, a body of global regulators and government officials, wrote in a letter released Wednesday that — unlike other recent shocks to financial markets — crises at US regional banks and Credit Suisse in March originated from “within the financial system.”

“So the need for financial authorities to learn lessons, and act upon them, is all the greater,” Knot wrote.

External shocks that have roiled global markets in recent years include the coronavirus pandemic and Russia’s invasion of Ukraine.

Speaking later on Wedneday, Andrew Bailey, governor of the Bank of England, said regulators could now place stricter liquidity requirements on lenders.

In other words, banks could be told to hold more assets that can be easily converted into cash to pay back creditors in times of crisis.

Worldwide, bank holdings of liquid assets have more than doubled since 2011 to €12.5 trillion ($13.7 trillion), according to Pablo Hernández de Cos, chair of the Basel Committee on Banking Supervision, the global standard-setter for banking regulation, who spoke alongside Bailey.

But that may still not be enough, given the ease with which bank runs can now gather pace.

Bailey said the speed of Silicon Valley Bank’s collapse begged the question as to “what are appropriate and desired liquidity buffers that create the time needed to take action to solve the problem.”

“We can’t assume that, going forwards, the current answer on the total size of liquidity protection is the correct one,” Bailey said in a speech.

The central bank chief added that lenders were more vulnerable to runs on their deposits than in the past because technology allowed customers to access their accounts quickly, and communicate more easily.

Knot, who is also president of the Dutch central bank, indicated that regulators were also concerned about current “prudential and resolution frameworks” for banks, though he did not provide further details.

A resolution framework provides a blueprint for winding down a failing bank without destabilizing the financial system or exposing taxpayers to the risk of losses.

But Karin Keller-Sutter, Switzerland’s finance minister, has said that following those guidelines during the crisis at Credit Suisse last month “would probably have triggered an international financial crisis.”

“I have come to the realization in recent weeks that a globally active, systemically important bank cannot simply be wound up according to the ‘too big to fail’ plan,” Keller-Sutter told Swiss newspaper Neue Zürcher Zeitung. “Legally, this would be possible. In practice, however, the economic damage would be considerable.”

Still ‘too big to fail’?

In the aftermath of the global financial crisis in 2008, regulators swooped onto banks to impose strict capital and liquidity requirements in order to reduce the likelihood that one would fail, as well as resolution measures in case a lender did fail.

Under the new rules, it was hoped that no bank could be considered “too big to fail” and so requiring a taxpayer-funded bailout.

But, during the most recent turmoil in March, regulators on both sides of the Atlantic sidestepped some post-2008 protocols.

In the United States, the Federal Deposit Insurance Corporation said it would guarantee all deposits held within Silicon Valley Bank, including those above $250,000 per person. That breached a legal limit set in 2010.

A few days later, Swiss authorities brokered an emergency takeover of Credit Suisse by larger rival UBS.

But Knot credited the current regulation with preventing troubles in the banking sector from creating a “broader contagion within the financial system.”

Still, he said, “we cannot be complacent.”

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