Skip to main content
Disciplines
Automotive Business IT + Informatics Construction + Real Estate Electrical Engineering + Electronics Energy + Sustainability Insurance + Risk Finance + Banking Management + Leadership Marketing + Sales Mechanical Engineering + Materials
Events
DE
EN
Books
Journals
Topic Page
Marketing
Start single access now
Access for companies
EXTENDED SEARCH
Log in
Top
Published in:
The Role of Banking Read chapter Read first chapter

2024 | OriginalPaper | Chapter

2. Risk Management and Banking Failures

Authors : Nordine Abidi, Bruno Buchetti, Samuele Crosetti, Ixart Miquel-Flores

Published in: Why Do Banks Fail and What to Do About It

Publisher: Springer Nature Switzerland

Log in

Activate our intelligent search to find suitable subject content or patents.

search-config
loading …

Abstract

The focus of this chapter is on the management of risks leading to banking failures. It examines regulatory responses to bank failures and highlights strategies to prevent such failures. The chapter also introduces emerging risks in the banking sector, including the impacts of climate change, digitisation technology, and cyber threats, underscoring the evolving nature of risk management in financial institutions.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

  • über 102.000 Bücher
  • über 537 Zeitschriften

aus folgenden Fachgebieten:

  • Automobil + Motoren
  • Bauwesen + Immobilien
  • Business IT + Informatik
  • Elektrotechnik + Elektronik
  • Energie + Nachhaltigkeit
  • Finance + Banking
  • Management + Führung
  • Marketing + Vertrieb
  • Maschinenbau + Werkstoffe
  • Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

  • über 67.000 Bücher
  • über 340 Zeitschriften

aus folgenden Fachgebieten:

  • Bauwesen + Immobilien
  • Business IT + Informatik
  • Finance + Banking
  • Management + Führung
  • Marketing + Vertrieb
  • Versicherung + Risiko




Jetzt Wissensvorsprung sichern!

inform now
previous chapter The Role of Banking
next chapter The Role of the Accounting Information in Banking Failures
Footnotes
2
For a comprehensive overview, see Chap. 5.
 
3
Bank resolution is the process of restructuring a failing bank in a way that safeguards public interests, including the continuity of the bank’s critical functions, financial stability, and minimal costs to taxpayers: https://​www.​srb.​europa.​eu/​en/​content/​what-bank-resolution.
 
4
Let us provide few recent illustrative cases:
i. Bank A: After being declared as failing, its capital instruments were revised and another financial institution acquired the bank (e.g. Banco Popular).
ii. Banks B and C: The Resolution Authority determined that public interest was not at stake for these banks. They were then liquidated as per their insolvency law, with a portion of their operations sold to another bank (e.g. Veneto Banca and Banca Popolare di Vicenza).
iii. Bank D and its subsidiary: Both entities were declared as failing, but the public interest criterion was not satisfied. In such situations, the resolution framework suggests orderly winding down based on applicable law (e.g. ABLV Bank).
 
5
In a recent article, Rajan and Zingales (2023) suggest that US government decision to cover uninsured deposits at Silicon Valley Bank (SVB) weakens free market discipline: https://​www.​imf.​org/​en/​Publications/​fandd/​issues/​2023/​06/​POV-riskless-capitalism-rajan-zingales.
 
6
See for example Freixas (1999) as well as Huang and Goodhart (1999) for a theoretical analysis, and O’hara and Shaw (1990) as well as Anginer and Warburton (2011) for empirical research.
 
7
A bank run occurs when customers of a financial institution simultaneously withdraw their deposits due to concerns about the institution’s financial stability. With more people withdrawing their funds, the likelihood of default rises, leading to even more withdrawals. In severe situations, the institution’s reserves might be insufficient to meet the withdrawal demands.
 
8
In continental Europe, the practice of universal banking developed in the nineteenth century, with institutions such as the Société Générale de Belgique and the Caisse Générale du Commerce et de l’Industrie (founded by Laffitte in France).
 
9
The Bretton Woods system of fixed exchange rates, which was established in 1944, began to unravel in the early 1960s. The US dollar, which was the anchor currency of the system, became increasingly overvalued due to a combination of factors, including the Vietnam War and President Lyndon Johnson’s Great Society programs. The overvaluation of the dollar led to a growing balance of payments deficit for the United States, as other countries were unwilling to purchase increasingly expensive dollars. In August 1971, US President Richard Nixon announced the ‘temporary’ suspension of the dollar’s convertibility into gold. This marked the end of the Bretton Woods system, and by March 1973, the major currencies had begun to float against each other.
 
10
See the Box, Diamond-Dybvig Model (1983).
 
11
The Basel III liquidity framework introduced two required liquidity ratios:
*
The Liquidity Coverage Ratio (LCR), which requires banks to hold sufficient high-quality liquid assets (HQLA) to cover their total net cash outflows over a 30-day stress period.
$$\displaystyle \begin{aligned} LCR = \frac{\text{HQLA}}{\text{Total net liquidity outflows over 30 days}} \geq 100\% \end{aligned}$$
 
*
The Net Stable Funding Ratio (NSFR), which requires banks to hold sufficient stable funding to exceed the required amount of stable funding over a one-year period of extended stress.
$$\displaystyle \begin{aligned} NSFR = \frac{\text{Available amount stable funding}}{\text{Required amount of stable funding}} \geq 100\% \end{aligned}$$
 
The LCR and NSFR are designed to ensure that banks have sufficient liquidity and funding to withstand a period of financial stress. The LCR focuses on short-term liquidity, while the NSFR focuses on longer-term funding. The Basel III liquidity framework is an important step towards improving the resilience of the global financial system. By requiring banks to hold more liquid assets and stable funding, the framework helps to reduce the risk of bank runs and financial crises.
 
12
In the US, FDIC deposit insurance is automatic for any deposit account opened at an FDIC-insured bank. The standard insurance amount is $250,000 per depositor, per FDIC-insured bank, for each account ownership category.
 
14
See for instance the run on the FTX cryptocurrency exchange in the late-2022: https://​www.​wsj.​com/​articles/​crypto-has-reinvented-bank-runs-11668019310.
 
15
At the average bank, that figure is around one-quarter.
 
22
Among the most important initiatives: At the worldwide level, the Paris Agreement signed in December 2015 by 195 nations to keep the rise in mean global temperature well below 2 \({ }^{\circ }\)C above pre-industrial levels and ratified during the 26th Conference of the Parties (https://​ukcop26.​org/​uk-presidency/​what-is-a-cop/​). At the European level, the European Central Bank (ECB) published its ‘Guide on climate-related and environmental risks’ in 2020. It sets out the ECB supervisory expectations for banks’ risk management and disclosure in this domain. This guide establishes a clear framework for European banks to accurately measure, mitigate, and disclose climate-related and environmental risks. (https://​www.​bankingsupervisi​on.​europa.​eu/​ecb/​pub/​pdf/​ssm.​202011finalguide​onclimate-relatedandenviro​nmentalrisks~582​13f6564.​en.​pdf). In addition, the ECB has adopted a climate agenda and started to carry out climate-stress tests in 2022, designed to prepare banks for both upcoming regulatory changes and climate related-risks, most notably transition and physical risks (https://​www.​bankingsupervisi​on.​europa.​eu/​ecb/​pub/​pdf/​ssm.​202212_​ECBreport_​on_​good_​practices_​for_​CST~539227e0c1.​en.​pdf).
 
27
For instance, the pressure on traditional banks’ profit margins may necessitate risk-taking.
 
28
More recently, however, interest rate increases by global central banks to contain the biggest inflation outbreak in four decades generated strains for banks.
 
29
Cyber risk is commonly referred to any risk of financial loss, disruption, or damage to the reputation of an organisation resulting from the failure of its information technology systems.
 
30
See Risk.net, ‘Top 10 operational risks for 2018’, as well as for 2019, 2020 and 2021.
 
32
Please see list and details on Appendix 1 in the NIST Framework Version 1.1:https://​doi.​org/​10.​6028/​NIST.​CSWP.​04162018.
 
33
Officially designated as Regulation (EU) 2022/2554.
 
34
Mentioned in Article 2(1), points (a) to (d).
 
Literature
Acharya, V. V., & Yorulmazer, T. (2007). Too many to fail—an analysis of time-inconsistency in bank closure policies. Journal of Financial Intermediation, 16(1), 1–31.CrossRef
Acquisti, A., Grossklags, J., et al. (2007). What can behavioral economics teach us about privacy. Digital Privacy: Theory, Technologies and Practices, 18, 363–377.
Aghion, P., Akcigit, U., & Howitt, P. (2015). The Schumpeterian growth paradigm. Economics, 7(1), 557–575.
Anand, K., Duley, C., & Gai, P. (2022). Cybersecurity and financial stability.CrossRef
Anderson, R., & Moore, T. (2006). The economics of information security. Science, 314(5799), 610–613.CrossRef
Anginer, D., & Warburton, A. J. (2011). The end of market discipline? Investor expectations of implicit state guarantees. Technical report, Syracuse University Working Paper.
Battiston, S., Monasterolo, I., Riahi, K., & van Ruijven, B. J. (2021). Accounting for finance is key for climate mitigation pathways. Science, 372(6545), 918–920.CrossRef
Berg, T., Burg, V., Gombovié, A., & Puri, M. (2018). On the rise of the FinTechs–credit scoring using digital footprints. federal deposit insurance corporation. Center for Financial Research WP, 4, 2018.
Berg, T., Carletti, E., Claessens, S., Krahnen, J. P., Monasterolo, I., & Pagano, M. (2023). Climate regulation and financial risk: The challenge of policy uncertainty.
Boffo, R., & Patalano, R. (2020). ESG investing: Practices, progress and challenges. OECD Paris.
Branzoli, N., Rainone, E., & Supino, I. (2023). The role of banks’ technology adoption in credit markets during the pandemic. Bank of Italy Temi di Discussione (Working Paper) No, 1406.
Buchak, G., Matvos, G., Piskorski, T., & Seru, A. (2018). Fintech, regulatory arbitrage, and the rise of shadow banks. Journal of Financial Economics, 130(3), 453–483.CrossRef
Buchetti, B., Miquel-Flores, I., Perdichizzi, S., & Reghezza, A. (2023). Greening the economy: How public-guaranteed loans influence firm-level resource allocation. Available at SSRN 4508502.
Demekas, M. D. G., & Grippa, P. (2021). Financial regulation, climate change, and the transition to a low-carbon economy: A survey of the issues. International Monetary Fund.
Dewatripont, M., Praet, P., & Sapir, A. (2023). The silicon valley bank collapse: Prudential regulation lessons for Europe and the world. VoxEU.org 20.
Do, C. T., Tran, N. H., Hong, C., Kamhoua, C. A., Kwiat, K. A., Blasch, E., Ren, S., Pissinou, N., & Iyengar, S. S. (2017). Game theory for cyber security and privacy. ACM Computing Surveys (CSUR), 50(2), 1–37.CrossRef
Duffie, D., & Younger, J. (2019). Cyber runs. Brookings.
Dupont, B. (2019). The cyber-resilience of financial institutions: Significance and applicability. Journal of Cybersecurity, 5(1), tyz013.
Eisenbach, T. M., Kovner, A., & Lee, M. J. (2022). Cyber risk and the us financial system: A pre-mortem analysis. Journal of Financial Economics, 145(3), 802–826.CrossRef
Fender, I., & Mitchell, J. (2009). The future of securitisation: How to align incentives? BIS Quarterly Review.
Ferguson, N. (2008). The ascent of money: A financial history of the world. Penguin.
Florackis, C., Louca, C., Michaely, R., & Weber, M. (2023). Cybersecurity risk. The Review of Financial Studies, 36(1), 351–407.CrossRef
Freixas, X. (1999). Optimal bail out policy, conditionality and creative ambiguity.
Gogolin, F., Lim, I., & Vallascas, F. (2021). Cyberattacks on small banks and the impact on local banking markets. Available at SSRN 3823296.
Gordon, L. A., & Loeb, M. P. (2002). The economics of information security investment. ACM Transactions on Information and System Security (TISSEC), 5(4), 438–457.CrossRef
Gordon, L. A., Loeb, M. P., & Zhou, L. (2020). Integrating cost–benefit analysis into the NIST cybersecurity framework via the Gordon–Loeb model. Journal of Cybersecurity, 6(1), tyaa005.
Griffin, P., & Jaffe, A. M. (2022). Challenges for a climate risk disclosure mandate. Nature Energy, 7(1), 2–4.CrossRef
Hahn, R., Reimsbach, D., & Schiemann, F. (2015). Organizations, climate change, and transparency: Reviewing the literature on carbon disclosure. Organization & Environment, 28(1), 80–102.CrossRef
Huang, M. H., & Goodhart, M. C. (1999). A model of the lender of last resort. International Monetary Fund.
Jamilov, R., Rey, H., & Tahoun, A. (2021). The anatomy of cyber risk. Technical report, National Bureau of Economic Research.
Jiang, E. X., Matvos, G., Piskorski, T., & Seru, A. (2023). Monetary tightening and us bank fragility in 2023: Mark-to-market losses and uninsured depositor runs? Technical report, National Bureau of Economic Research.
Kacperczyk, M., & Peydró, J.-L. (2021). Carbon emissions and the bank-lending channel. Technical report, Centre for Economic Policy Research.
Kashyap, A. K., & Wetherilt, A. (2019). Some principles for regulating cyber risk. In AEA Papers and Proceedings (Vol. 109, pp. 482–487). American Economic Association.
Kindleberger, C. (1993). A financial history of Western Europe. Oxford University Press.
Laeven, L. (2011). Banking crises: A review. Annual Review of Financial Economics, 3(1), 17–40.CrossRef
Lo, A. W. (2012). Reading about the financial crisis: A twenty-one-book review. Journal of Economic Literature, 50(1), 151–178.CrossRef
Monasterolo, I. (2020). Climate change and the financial system. Annual Review of Resource Economics, 12, 299–320.CrossRef
Monasterolo, I., Mandel, A., Battiston, S., Mazzocchetti, A., Oppermann, K., Coony, J., Stretton, S., Stewart, F., Dunz, N., & Max, F. (2022). The role of green financial sector initiatives in the low-carbon transition: A theory of change. Technical report, World Bank.
O’hara, M., & Shaw, W. (1990). Deposit insurance and wealth effects: The value of being “too big to fail”. The Journal of Finance, 45(5), 1587–1600.
Pierri, N., & Timmer, Y. (2022). The importance of technology in banking during a crisis. Journal of Monetary Economics, 128, 88–104.CrossRef
Rajan, R. G. (2006). Has finance made the world riskier? European Financial Management, 12(4), 499–533.CrossRef
Ramakrishna, S. P. (2023). Climate change risk management in banks: The next paradigm. In Climate change risk management in banks. De Gruyter.
Stiglitz, J. E., Stern, N., Duan, M., Edenhofer, O., Giraud, G., Heal, G. M., La Rovere, E. L., Morris, A., Moyer, E., Pangestu, M., et al. (2017). Report of the high-level commission on carbon prices.
Vives, X. (2019). Digital disruption in banking. Annual Review of Financial Economics, 11, 243–272.CrossRef
Welburn, J. W., & Strong, A. M. (2022). Systemic cyber risk and aggregate impacts. Risk Analysis, 42(8), 1606–1622.CrossRef
Metadata
Title
Risk Management and Banking Failures
Authors
Nordine Abidi
Bruno Buchetti
Samuele Crosetti
Ixart Miquel-Flores
Copyright Year
2024
Book
Why Do Banks Fail and What to Do About It

Print ISBN: 978-3-031-52310-6

Electronic ISBN: 978-3-031-52311-3

Copyright Year: 2024

DOI
https://doi.org/10.1007/978-3-031-52311-3_2