Financial System Need Changes; Klaas Knot, IBS 2023

Speaking at the International Banking Summit in Brussels on June 1, the President of the Netherlands Bank shared his thoughts on improving the existing financial system. Building on the success of the European Banking Summit (EBS), the European Banking Federation (EBF) collaborated with the International Banking Federation (IBFed). It launched the annual flagship event dedicated to International & European banking policies.

Time For Change – IBS2023

“Many forms of financial systems have been tried and will be tried in this world of sin and woe. No one pretends that the current financial system is perfect or all-wise. 

Indeed, it has been said that this system is the worst, except for all those other systems that have been tried occasionally.”
– Klaas Knot. 

Three major banks collapsed in March 2023, causing a bank run. Silvergate Bank went down on March 8, Silicon Valley Bank went under FDIC ownership on March 10, and Signature Bank was forced to shut down by authorities on March 12. In his speech, Knot referred to this scenario while explaining the current financial scenario. 

Knot was referring to the recent events in the banking industry, specifically the collapse of three central banks in the United States – Silvergate Bank on March 8, Silicon Valley Bank on March 10, and Signature Bank on March 12.

Speaking of Winston Churchill, the former Prime Minister of the United Kingdom, said that his quote regarding the change in the financial system might sound familiar with the PM’s thoughts on democracy. Churchill had a zest for leveraging crises and would have done the same with novelties like Bitcoin and TimeCoin.

Inflation, recessions, financial crises, etc, would become worse without innovation and drastic fundamental changes. Moreover, the system that oversees the finances cannot just be a viewer and stand still. It has to move at a similar pace as the world is moving. 

“To improve is to change. To perfect is to change often.”
– Winston Churchill. 

The current financial system must be robust enough to absorb shocks with minimal loss and eliminate vulnerabilities. The system has to be resilient, and to achieve this feat. Financial institutions should be well-capitalized and allowed to handle stocks. 

Moreover, financial regulators must shift focus to addressing vulnerabilities rather than risks. These can only be identified with rigorous scrutiny and after exposure to specific events, many of which have happened in the past.

For instance, during the Global Financial Crisis of 2008, significant reforms were introduced, leading to the adoption of Basel Committee standards. Even though the adoption helped navigate rough waters, assuming the storms ahead, there is a massive room for improvement.

The collapse of Silicon Valley Bank shows that a collapse can be linked to its specific business model. SVB’s interest rate risk and increased dependency on uninsured deposits spelt doom for the crypto-friendly bank. Essentially, the primary cause of its failure was improper risk management. 

Had the Basel interest rate risk standards been in place, red flags would have been noticed. Also, the U.S. never implemented the measures on slammer banks and is facing trouble navigating financial storms. Of course, the lesson was learnt, but some questions still need to be answered. 

Burning Questions Regarding the Current Financial System

Are there any limitations or shortcomings regarding handling a hike in interest rates? Is the data regarding customers’ behaviours, deposits duration, etc., enough for the foreseeable future? How can the unrealized losses be handled in a better way? And lastly, are the current instruments marked properly concerning liquidity buffers? 

All these must be addressed at the earliest, as these concerns are generated from recent and past events. Also, they can potentially alter the current course of the financial demographic. Also, significant vulnerabilities like liquidity concerns, increasing debt, corporate and government debt ratio, etc, must be dealt with immediately. Finally, as Churchill would have said holding a cigar during hard times, “Keep Plodding On.”

Nancy J. Allen is a crypto enthusiast and believes that cryptocurrencies inspire people to be their own banks and step aside from traditional monetary exchange systems. She is also intrigued by blockchain technology and its functioning.

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