The Banking Executive Magazine - October 2023

A Note to the Future tions in setting their internal strategic priorities and/or their remuneration policies, despite their critical impor- tance. This entrenched asset bias cre- ates and maintains the seeds of future similar problems arising, as the quicker and easier path of increased risk assumption to bolster profits is preferred, at the expense of the safer, slower and albeit more difficult lia- bility-focused approach. To be clear, all banks adopt both approaches, but the degree of time, investment, man- agement commitment and compen- sation allocation between them requires serious re-balancing if more sustainability in earnings is to be achieved. CAPITAL ADEQUACY My third truism centres on capital adequacy. Its erosion is usually a consequence of misjudged risk deci- sions or, to a lesser extent, is due to lack of control on costs or on divi- dend pay-outs. Although it enjoys voluminous coverage under the Basel guidelines, capital adequacy however represents a slower type of banking ailment which can often- times be delayed, massaged and even disguised by creative account- ing measures of over accommoda- tive external auditors, and can even at times be overlooked by regulators or their governments seeking to defer or hide any signs of banking instabil- ity or economic stress. Capital gaps, unlike their liquidity equivalents, are not mortal events so long as deposi- tors do not panic and continue to trade normally with the bank. I am not arguing that undercapitalization is acceptable or is not a relevant fi- nancial and regulatory measure of fi- nancial good health but only that its consequences should be put into proper context in the overall spec- trum of banking risks and failures, based on actual bank failure experi- ences. THE REGULATORY LANDSCAPE My penultimate point is on the regu- latory landscape. Supervision under the Basel aegis has exponentially mushroomed, annually comple- mented with new thematic launches which are often of debatable value to large segments of the industry. This raises a number of questions: has the current age of regulatory overflow re- duced systemic risk? Has a safer more growth-conducive banking and economic environment been cre- ated? Has the ‘one size fits all’ ap- proach dominating most regulations been effective? Are key banking reg- ulations fair and even handed across and within countries? Is regulatory independence a free pass to commit errors with serious long term eco- nomic consequences, at no risk of accountability to the responsible reg- ulators for their well-established fail- ures? Are consumers receiving better and fairer value from banks? For a pre-Basel 1 banker, the answer is, on balance, an emphatic ‘no’ to all the questions above with the pos- sible exception of the consumer pro- tection issue where the pendulum has over-swung to the other extreme. ISSUE 178 OCTOBER 2023 the BANKING EXECUTIVE 39