Challenges and Opportunities For Financial Regulators with Recent Bank Failures

With recent bank failures comes rising uncertainties and concerns related to the stability of the financial industry. To address these concerns, financial regulators may need to consider strengthening and modernizing regulations and supervisory practices to facilitate earlier identification and mitigation of risks posed by financial institution investment portfolios, including significant asset and funding concentrations. In some rapidly changing situations, regulation alone may not be sufficient to adequately mitigate risks, especially in an environment with heavy investment and relatively new and volatile financial products (e.g., digital currencies). In addition, financial institutions with high amounts of uninsured deposits are more vulnerable to runs, as account holders with uninsured funds are more sensitive to bad news and will more quickly move funds to protect them. Actions taken by regulators can effectively moderate deposit outflows and ensure future stability of the US financial system by addressing the following:

• Lack of diversification and overinvestment in low-earning assets, coupled with an unforeseen inability to meet short-term liquidity demands that can lead to substantial losses.
• Overexposure to commercial real estate loans with higher interest rates and increasing office vacancies.
• Lack of insight related to climate-related financial risks and the availability of data to appropriately measure and assess climate-related financial risk.
• Inability of financial institution management to adequately forecast risk, understand risk drivers, and recognize the severity of potential issues that may lead to collapse.

The Opportunity

Understanding the conditions that lead to banking failures can help federal agencies better recognize the impact of regulatory decisions. With the ever-changing financial environment, financial institutions and regulators should remain adaptable to volatility in the economy. By staying proactive and ready to respond quickly in times of financial turmoil, regulators will be prepared to reduce the risk of further damage to the economy. By finding ways to preemptively address potential cash flow issues encountered by financial institutions, regulators can help increase liquidity and build liquidity buffers. Building predictive risk models that leverage automated tools and incorporate forward-thinking capabilities can help forecast the timing and likelihood of potential failures and future financial industry crises and allow regulators to put appropriate rules in place.

Conclusion

The banking industry in the US is heavily regulated and it’s important that investment portfolios, product offering mix, types of lending, etc., are fully understood by regulatory agencies in order to enact and enforce effective banking rules and regulations and to adapt as conditions change. By investing time upfront, taking a deliberate and coordinated approach and looking at the full impact of the conditions and decisions that led to recent bank failures, regulators will be able to enhance their supervisory practices and tools to recognize potential risks and issues more quickly and recommend corrective action as appropriate.

How Can Guidehouse Help?

Guidehouse has a robust history of partnering with federal financial regulators to support both steady-state needs and provide surge resources to federal agencies and financial institutions during times of crisis. Guidehouse can help reduce the risk of current conditions leading to future crisis by understanding the causes of recent failures and making recommendations to better plan for and reduce the risk of future recurrence. Additionally, we can provide tools for regulators to proactively identify and mitigate risks that may lead to future bank failures and forecast conditions that may lead to future crises. 

Since the 2008 financial crisis, Guidehouse has provided reliable and efficient support of bank and credit union failure activities during the pre-close, close, and post-close phases. Our professionals have worked on pre-close activities for more than 290 banks and credit unions, including over 150 closings. Our professionals are flexible and extremely responsive, able to handle last-minute submissions and requests, while working toward the goal of maximizing asset values. Guidehouse is passionate about helping our clients solve complex problems while creating valuable solutions that positively impact society.
Guidehouse experts include former compliance officers, regulators, data experts, accountants, prosecutors, attorneys, bankers, and law enforcement officers. Guidehouse also offers relevant services in the following areas: 

• Data, Analytics, and Intelligence
• Digital & Technology
• Finance
• Risk, Regulatory, & Compliance
• Risk Management
• Sustainability