How well are banks doing at preventing another major financial calamity? According to Forbes, financial regulators have been establishing tighter rules based on Basel III standards to ensure the sustainability of global banks in the event that another economic disaster occurs in the future. Basel III standards came about as a result of the inadequate financial regulation that was a major factor in the global economic decline in 2008. These voluntary, regulatory standards go into full effect in 2019 and serve as the foundation for bank capital adequacy, stress testing and liquidity risk analysis around the world.
Based on recent stress tests, banks are still in the process of getting into stronger positions. This week, Reuters reports that 36 European Union banks failed a health check of their financial soundness. More specifically, 25 European banks failed a test of whether they could withstand a recession, and another 11 would have failed if the full Basel III standards were in effect today according to data from the European Banking Authority. When Moody’s did further research, it discovered that a number of banks that passed the health check did so by very thin margins. Therefore, all of the banks are expected to do more to be able to meet the standards.
When considering the largest banks around the globe (American, European, etc.), there are some complicating factors. Reuters and Dailyfinance.com point out that the world’s largest banks have increased in size since the 2008 financial crisis and are comprised of even more separate entities that are involved in an unwieldy mix of credit obligations and trading positions. According to regulators, banks are hindered by poor risk-management data and struggling to get a grasp on the full scope of their trading activities and asset quality. As a result, six years after the financial crisis regulators and the industry they oversee can’t confidently assess big-picture threats to the U.S. financial system. Furthermore, the Basel Committee of bank regulators said only one-third of the world’s 30 largest banks would have a sufficient grip on their risk-management data by 2016.
So, what’s being done about these challenges? In trying to address these issues and meet more strict regulatory standards, global banks are hiring people with experience in data governance and analytics. Recruitment calls for these capabilities have jumped up in the last 18 months as regulators have issued more non-public enforcement actions.
Additionally, the U.S. Federal Reserve is considering turning an annual health check it uses to judge whether large U.S. banks have enough capital to survive economic downturns into a critical tool to prevent excessive financial risks. Such a move could force banks to retain billions of dollars that would have gone to shareholders. If the Federal Reserve decides to use the health check as such a tool, don’t be surprised if this action is followed by banking executives complaining of excessive regulatory burdens.