The Banking Executive Magazine - October 2023

A Note to the Future EFFECTIVE RISK FRAMEWORKS Accordingly, the first future truism is the need for very effective and dy- namic risk identification, monitoring, measurement, management and re- mediation frameworks. These should be properly implemented by quali- fied bank staff with sufficient inde- pendence to withstand the inevitable pressures from their peers in revenue centres. The key pillars of this ap- proach are a full buy-in by a compe- tent Board and qualified CEO, advanced MIS and forward-looking data analytics to ensure a real time – not post fact – enterprise wide holis- tic risk vision, and lastly a continuing commitment to the long-forgotten magic potion of common sense and reality checks at all levels. If greed negates common sense and avarice overrules informed independent judgement, it is a matter of ‘when’ not ‘if’ the ship hits the rocks, as seen with many regional and international banks over the years. Being sustainably profitable within a low risk (‘boring’) business operating profile is the ultimate accolade for any successful business. However, this requires a major mind set revi- sion which does not appear to be taking hold as the banking industry continues its repetitively myopic scramble to boost returns through quantitative increases in risk assump- tion while ignoring or failing to prop- erly understand and harness the major opportunities provided by data and technology, the two great mod- ern enablers, to achieve its profit as- pirations at lower, not higher risk levels. AVOIDING FUNDING MELTDOWNS The second future truism is the con- tinuing absolute primacy of banks’ funding activities over their asset mo- bilization operations. Banks typically fail for liquidity reasons, not because of provisions eroding their capital ad- equacy. Liquidity crises are sudden massive coronary attacks resulting in quick fi- nancial demise as happened to Bear Sterns and Lehman Brothers in 2008 and to Silicon Valley Bank (SVB) and Credit Suisse in 2023. Only unprece- dented government interventions at very high economic costs contained the list of failed banks and averted systemic meltdowns. The avoidance of funding disruptions is therefore the present and future crux of banking prudence and successful continuity. The rapid timing and pace of liquid- ity crises has been exacerbated by digital technology facilitating instan- taneous large withdrawals by clients through e-channels, as seen in the re- cent spate of US regional bank fail- ures. Despite this truism, banks have been, and continue to be, predominantly run with an asset-focused mentality. Funding availability, growth, diversi- fication and costs are rarely recog- nised to the same extent by the industry in its annual awards and plaudits, or by the individual institu- the BANKING EXECUTIVE 38 ISSUE 178 OCTOBER 2023