How should credit risk management systems and procedures be improved at investment banks investing clients' money in securities so as to significantly reduce the levels of potential systemic credit risk generated and reduce the frequency and scale of financial crises developing?
The bankruptcy of Silicon Valey Bank and Signatire Bank, i.e. banks operating within the framework of investment banking based on equity investments in securities has resulted in investor anxiety, increased levels of uncertainty in financial markets, including equity markets, securities markets. Once again, the question of the possibility of a repetition of the situation of the global financial crisis of 2007-2009 has resurfaced, with central banks intervening swiftly and efficiently to fully guarantee all deposits and bank deposits above the statutory limits set for deposit guarantee institutions. This raises the debatable question of why, 15 years after the global financial crisis of 2007-2009, there are still cases of large investment banks failing when, moments afterwards, the central bank announces the full guarantee of all bank deposits and bank deposits and without quota limits in each of the remaining functioning banks. And this is what happened moments after Silicon Valey Bank and Signatire Bank declared bankruptcy. In addition to this, another debatable issue arises regarding the potential for an increase in the scale of moral hazard in both the commercial and investment banking community as well as in bank customers, which could lead to a significant increase in the level of acceptable investment, credit, liquidity, debt, etc. risks for many businesses. If this were to happen, the result could be an increase in systemic credit risk in the banking sector, which is hardly the purpose of central banking, but rather the opposite. But, on the other hand, some central banks also carry out financial operations on international financial markets, often making substantial revenues and profits. This raises a third debatable issue, which is to consider the key priorities of central banks' activities in addition to looking after the value of money and the stability of the banking system. The central bank's participation in the process of injecting additional money into the economy through the purchase of treasury bonds and carrying out financial operations in the international financial markets, including the foreign exchange markets and with the use of securities to a significant extent can influence the formation of the national currency exchange rate on the one hand and can be a way to generate profits for the central bank on the other. Obviously, the issue of the stability of financial markets, the security of the banking system, the formation of the value of the currency within a certain range, not allowing too high a level of overcredit for investment processes carried out by various economic entities also operating in non-financial sectors of the economy and not allowing too high a level of systemic credit risk in banking are key priorities. These priorities are legally anchored both in the Constitution, i.e. the Basic Law, and in the legal norms defining the functioning of the central bank. Of course, the high-security banking system thus built does not exempt commercial banks and investment banks from the need to continually improve their credit risk management systems. New information technologies and Industry 4.0 are emerging and are also being implemented into banking. New risk factors that are difficult to predict are emerging, such as the occurrence of the SARS-CoV-2 (Covid-19) coronavirus pandemic in 2020. Situations continue to arise where the optimum levels of credit risk are exceeded with regard to the investment banks' equity investments in securities. Consequently, there is still a high degree of possibility that investment banks operating in the capital markets may permanently lose liquidity as a result of certain investment decisions and the quality of the credit risk management improvement process carried out. Also, the banking supervisory institutions, the institutions supervising the financial system should review the issue of the adequacy of the prudential instruments applied by banks, instruments for controlling credit risk, liquidity risk, debt risk, operational risk, market risk, foreign exchange risk, interest rate risk, cyber risk, etc. in view of the changing reality in which banks and the whole banking system operate. It is therefore necessary, in this regard, for banking supervisory institutions, institutions overseeing the financial system, to carry out a kind of ongoing monitoring of the adequacy of the credit risk management systems applied in banks and other risk categories, in order to continually answer the question of whether these systems have become obsolete in the context of the technological progress taking place and the emergence of new risk factors not previously known or not previously present on a large scale in the banks' environment or occurring in their customers. Therefore, both the financial supervisory institutions and the risk management departments of commercial banks, deposit and credit banks and investment banks are once again reviewing the adequacy of the applied prudential and risk control instruments, procedures and credit risk management systems in relation to the situation of the growth of investment and other risks, the possibility of a deepening of the downturn in the economy, in the reality of high inflation, high interest rates, the possibility of stagflation.
In view of the above, I address the following question to the esteemed community of scientists and researchers:
How should credit risk management systems and procedures be improved at investment banks investing investor clients' money in securities so as to significantly reduce the levels of potential systemic credit risk generated and reduce the frequency and scale of the development of financial crises?
What do you think about this subject?
What is your opinion on this subject?
Please respond,
I invite you all to discuss,
Thank you very much,
Warm regards,
Dariusz Prokopowicz
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