Hernández de Cos: Supervisory effectiveness key after 2023 turmoil

The banking turmoil of March 2023 exposed significant qualitative weaknesses in affected institutions, including poor governance, weak risk management, and unsustainable business models.

These issues manifested as liquidity runs and market corrections, despite banks often meeting capital and liquidity requirements.

Supervisory post-mortem reviews consistently identified delays in addressing these qualitative shortcomings, even when early warning signs were present.

Institutional, legal, and operational constraints frequently hindered timely action by supervisors.

The complexity of the regulatory framework also contributes to these challenges, imposing operational burdens and reducing transparency for market participants, ultimately weakening market discipline and effective risk oversight.

The supervisory process often faces cumulative gaps and frictions, hindering early and decisive action.

Risk scoping can be too narrow, overlooking fundamental issues in governance or business model sustainability.

During risk assessment, strong financial performance under benign conditions can obscure underlying weaknesses, leading to more favourable supervisory ratings and delayed interventions.

A reluctance to pursue formal actions, often due to legal concerns, can lead to over-reliance on informal tools like moral suasion.

These informal measures, while useful, may lack the urgency and clear consequences needed to drive meaningful change, allowing identified risks to fester.