Sunday Times E-Edition

Sim Tshabalala says banks need close regulation

SIM TSHABALALA

The Standard Bank Group has just held the African Central Banks Conference (ACBC), which brings together many of Africa’s prominent financial sector regulators and policymakers. This year it took place at a particularly interesting and relevant time to be discussing bank regulation.

No doubt we will learn a lot more about what happened at Silicon Valley Bank (SVB) over the next weeks and months. For the time being, there seem to be six immediate and obvious lessons from the sudden collapse of Silicon Valley Bank and Signature Bank in the US. Obvious perhaps — but nonetheless very important.

First, the Basel III system has once again demonstrated that it is a lot more robust than pre2008 regulation. No serious commentator believes that there is much risk of wider contagion from the two banks’ failure. Banks and their clients everywhere have good reason to be grateful for the foresight and rigour of the Basel Committee on Banking Supervision — and it’s worth noting that African expertise played a big part in crafting and implementing these rules. Good things happen when the world listens to Africans.

Second, there may well be a need to revisit regulation for smaller and niche banks. An oddity of the US regulatory system is that SVB was considered too small to be required to hold the same levels of capital and liquidity as bigger banks.

As well as flying under the radar in this way, it specialised in taking wholesale deposits from close-knit and highly correlated sets of firms. There’s no doubt that it’s appropriate for a great deal of attention to be focused on large, systemically important financial institutions. But the fragility inherent in smallness and narrowness is now in need of a closer look.

Third, among other flaws in its model, it’s notable that SVB wasn’t lending very much to clients — which was why it had such huge holdings of long-dated T-bills.

Because it wasn’t lending on to clients, it was only on one side of interest rate changes, which increased its risk. Even more importantly, it was not fulfilling the real social and economic function of a bank — which is to support growth and development by safely and accurately mediating between surplus and deficit units of the economy.

Fourth, the two collapses can be seen as the first bank runs of the truly digital age. In 2007-8, banking apps were still in their infancy and corporate deposits were usually not withdrawable instantly, with a single click. Equally, panic could not spread as quickly as it does now, via social media. SVB probably was solvent, if loss-making. But it could not withstand even a single afternoon of digitally propagated anxieties coupled with the capacity to withdraw funds instantly.

Perhaps it would be appropriate to contemplate a capacity to impose brief pauses on wholesale digital withdrawals, in a way roughly analogous to how stock exchanges sometimes stop trading for an hour or two to allow market participants to absorb new information and recover from a moment of panic.

Fifth, these incidents powerfully remind us of the close symbiosis between banks and their regulators. The commercial banking sector simply can’t function sustainably without very close regulation — regulation that must be ultra-intrusive whenever necessary. One has to admire, for example, the capacity of the US authorities to take full control of two fairly large banks over the course of a weekend.

However, as well as being intrusive when necessary, banking regulation should be based on a high level of mutual respect, understanding and co-operation. This past weekend also provided a great illustration of the value of this sort of cooperation, when the Bank of England announced that HSBC had bought the UK subsidiary of SVB. HSBC and the Bank of England fully understand and trust each other on this matter — and that mutual understanding enables the UK banking system to absorb this shock with very little difficulty.

Last — and perhaps most importantly — these events reinforce the point that innovation doesn’t change the fundamental nature of banking or of how banking risks should be managed.

SVB presented itself as a new kind of bank, with a new kind of culture — much closer to the venture capitalists and tech businesses of Silicon Valley itself. Despite this façade, it was in fact just doing old-fashioned banking — and not doing it very well.

As South African Reserve Bank governor Lesetja Kganyago has famously — and rightly — said, if it’s yellow and quacks and walks like a duck, then it’ sa duck. This was just a bank — not a very good bank

— and should have been regulated as such.

Bringing things back to Africa, a similar point applies to Central Bank Digital Currencies (CBDCs), which several African central banks are considering, with Nigeria having already launched the first African CBDC.

State-owned retail banks are of course not unusual; and even a central bank that is also a retail bank is not unheard of. Australia, for example, used to have both functions very successfully performed by a single entity.

The key question is whether the retail-banking arm of the public sector is subject to the same kinds and levels of regulation as its private sector competition.

If so, then all is well. If not, then calling it a “CBDC” rather than a state-owned retail bank does nothing to mitigate the risks and moral hazards that an unfairly regulated institution could introduce into the financial system.

As we have all just been reminded, the stability of the banking system matters a great deal to everyone. Banking, in many senses, is analogous to the practice of law or medicine: it really has to be done right, which means that it must be very carefully and uniformly regulated. When an entity, no matter what it calls itself, performs the functions of a bank, then that is what it is, and it should be regulated as such.

The commercial banking sector simply can’t function sustainably without very close regulation

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2023-03-19T07:00:00.0000000Z

2023-03-19T07:00:00.0000000Z

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