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Bank CEOs Weigh-In On Proposed Basel III Endgame

Also: Firms Set For Staff Reductions

Author

Naeem Qasim
December 07, 2023

Welcome back to the Risk Queue,

This week the Bank CEOs weigh in on the Basel III Endgame, plus more Firms are looking for efficiency, and we have analysis on the SEC and CFTC yearly summary of enforcements for you.

Lets get to it,

Naeem Qasim

CEO & Founder, Risk On Q

Risk Headlines

Bank CEOs Provide Senate Banking Committee Challenges to Basel III Endgame - Source BankingSenate.gov

Key Points:

  • Last week we shared how the Basel III rules (B3E) to estimate operational risk capital (ORC) could impact banks if implemented. This week Bank CEOs are speaking to Senators on how the proposed B3E rules significantly increase capital requirements by about 25% for largest banks, exceeding what's required internationally. Also they state it raises costs for banks, resulting in higher borrowing costs for consumers and businesses. The effectiveness is questionable given this proposal would not have prevented recent isolated bank failures.

  • There is clearly a need for more data and rigor to truly understand the proper balance of regulation and oversight needed here. Banks must continue to proactively enhance risk management to ensure the safety and soundness of the overall system. We believe a practical approach would be that Banks report on the investments being made to enhance the operational capabilities that actually detect, mitigate and reduce risk, this will allow Regulators to examine areas of deficiency in the banks risk profile. The investments to these activities are where both Banks and Regulators can truly gain the insights to pursue appropriate capital requirements.

You can see the full video at Banking.Senate.gov here. 

A. I. Risk / Technology Risk

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Comerica experienced major issues after a technology upgrade to its wealth management platform, resulted in transaction failures, duplicate/incorrect payments for trust clients and system crashes and it caused Comerica's own accounts to become significantly overdrawn due to reimbursement issue. OCC investigating the problems related to the platform change

Fines, Losses, & Rules

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Recent issues highlight problematic cultures in audit teams: misconduct, cheating, workpaper backdating. Firms must commit to auditor independence and public interest, not just audit quality. Repeated instances are troubling and warrant reinforcing culture expectations. SEC stressing disclosures should focus on what's useful for reasonable investors

Emerging Risk

The CEO indicated that the bank is "not even close" to achieving the desired level of efficiency.

**Regulatory filings have revealed that the major U.S. banks have laid off a combined 20,000 workers since the start of 2023. The biggest drops in staff headcount have been at Wells Fargo and Goldman Sachs, with both cutting around 5% of their workforce.

Other banks that have made layoffs or planned cuts: 

  • Truist, Laid off employees as part of a larger cost savings program

  • Bank of America, Cut 7,500 jobs

  • Citi, at least 10% of employees could be laid-off

  • TD Bank, Planned a three per cent cut to its workforce

Risk Data to Geek Out On

SEC and CFTC 2023 Enforcement Summary and Analysis - Source RiskOnQ.com

The data analysis below is from the enforcement statistics and case details from the SEC and CFTC for fiscal year 2023. The SEC brought 784 total enforcement actions, obtained orders for nearly $5 billion in financial remedies, and the CFTC filed 96 enforcement actions resulting in over $4.3 billion in penalties and restitution.

Analysis

  • Both the SEC and CFTC have been focused on enforcement in emerging areas like crypto assets and digital assets amidst massive growth and incidents of fraud and manipulation. Major cases against key players like FTX showcase crackdowns on ecosystem violations.

  • Insider trading and disclosure violations remain consistent areas of SEC enforcement targeting gatekeepers and public companies which is crucial for market integrity.

  • There is increasing synchronization between the agencies on exchange, intermediary and market manipulation issues in digital asset ecosystems. As the space matures, enforcement actions can be expected to grow.

  • Record financial remedies indicate that regulators are emphasizing accountability. Larger, high-impact cases like FTX act as deterrence for the industry. However, continued resources and capabilities to detect complex schemes early will be important.

  • Overall the data highlights the expansion of regulatory scrutiny into new market areas along with traditional concerns. With significant financial remedies imposed, awareness and compliance costs may increase for businesses which could impact innovation and competitiveness without the right balance.

The below represents the largest fines levied against financial institutions based on the SEC and CFTC enforcement data spanning across recordkeeping, reporting, manipulation, and other violations.

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Thanks for reading.

Until next time!

Naeem

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