How the historical echo of “too big to fail”
now feels in the distant past
It’s been an interesting week in the markets as the impact of SVB continues to be felt, noting also a similar fate has hit Signature Bank. It will be interesting to see how KPMG, auditors of both ill-fated firms, manages the reputational impact as their auditors.
In a 5 domino play we have seen the plight of the 16th largest US Bank who, before the call to raise capital and subsequent run on the Bank, held $212bn in assets. The dominoes were:
It’s a stark reminder to not be complacent. There are undoubtedly questions to be asked and lessons to be learned. Is this the start of the next financial crisis? I rather believe and hope not, but it will raise the eyebrow of the regulators and the politicians on what the peaks of the ripple effect are likely to be. Especially when compounded by the news of Credit Suisse’s funding needs emerging in the same week.
There are some clear indicators that all was not well – even allowing for the fact that the differing regulatory and accounting regimes require different standards and application.
- Hike in interest rates, causing a reduction in the value of the bonds.
- Tech companies drawing on their deposits while seeing mass layoffs.
- Bonds are sold at a loss, creating a…
- Need to raise capital and a…
- Subsequent panic and run on the bank.
It’s a stark reminder to not be complacent. There are undoubtedly questions to be asked and lessons to be learned. Is this the start of the next financial crisis? I rather believe and hope not, but it will raise the eyebrow of the regulators and the politicians on what the peaks of the ripple effect are likely to be. Especially when compounded by the news of Credit Suisse’s funding needs emerging in the same week.
There are some clear indicators that all was not well – even allowing for the fact that the differing regulatory and accounting regimes require different standards and application.
The absence of a Chief Risk Officer for more than eight months probably meant that linkages between the Three Lines of Defence – operations, review and control mechanisms, and the oversight activities of the board are naturally weakened. And the ability of a CRO to intervene “behind the scenes” to hold both staff and the senior management team to account is an opportunity lost.
This plays to the cultural point: how to embed the right behaviours from the top to the bottom of the business and how the right culture can enable a business to really challenge the assumptions and decision-making (and the decisions) of any business in an open way and chart a considered path forward.
This then links the human capital management to organisational governance and controls. Boards and functional teams are seeking answers to how to address these cultural points which can be addressed through training, operational and practical governance, and effective flows of information both up and down an organisation – and across – to “join the dots”.
For the UK players, this question of how to integrate human capital governance into organisational governance effectively is very pertinent to many as the deadline for implementing Consumer Duty draws closer. It’s a complex task to align staff and culture with the Consumer Duty outcomes, considering how this impacts recruitment, succession planning, design of retention/re-attraction packages and welfare and training. Aligning the “tone from the top” with the “tone from within” to the experience of the customer is critical and requires well thought through governance, wellbeing, and management to enable staff to “bring their whole selves to work”.
This need for cohesion and a transparent connectedness becomes more apparent as we see markets in turmoil and consumers questioning the very stability of the financial system. It’s a challenge that strikes at the very core of many firms.
This plays to the cultural point: how to embed the right behaviours from the top to the bottom of the business and how the right culture can enable a business to really challenge the assumptions and decision-making (and the decisions) of any business in an open way and chart a considered path forward.
This then links the human capital management to organisational governance and controls. Boards and functional teams are seeking answers to how to address these cultural points which can be addressed through training, operational and practical governance, and effective flows of information both up and down an organisation – and across – to “join the dots”.
For the UK players, this question of how to integrate human capital governance into organisational governance effectively is very pertinent to many as the deadline for implementing Consumer Duty draws closer. It’s a complex task to align staff and culture with the Consumer Duty outcomes, considering how this impacts recruitment, succession planning, design of retention/re-attraction packages and welfare and training. Aligning the “tone from the top” with the “tone from within” to the experience of the customer is critical and requires well thought through governance, wellbeing, and management to enable staff to “bring their whole selves to work”.
This need for cohesion and a transparent connectedness becomes more apparent as we see markets in turmoil and consumers questioning the very stability of the financial system. It’s a challenge that strikes at the very core of many firms.
March 2023
