Local Regulatory Authorities Fail to Show Backbone in Banking Sector

A Wake-Up Call for Regulatory Oversight

In a shocking turn of events, the local regulatory authorities have been found wanting in their role as watchdogs over the banking sector. Despite assurances from the central bank that banks are compliant with regulations, recent events have revealed a stark contrast between the reality and the rhetoric.

Banks Given False Sense of Security

Banks seem to have been given a false sense of security by the regulators, leading them to take excessive risks in pursuit of profits. This has resulted in a crisis of confidence, as banks quickly switch from cushioning risks to dealing with caution, leaving clients high and dry.

Consequences of Lack of Oversight

The consequences of this lack of oversight are far-reaching, with many types of risks going unmanaged or mismanaged. Traditional risk analyses fail to account for the unpredictable nature of modern financial markets, leading to slow and inadequate responses to emerging threats.

• Risk management failures are behind banks’ recent switch from “cushion” to “caution”.
• The conduct of banks operating in Lebanon has redefined failure and erased all of their self-proclaimed successes.
• Losses are expected to deplete most of the capital, making banks vulnerable to crisis.

Call for Action

Mohammad Ibrahim Fheili, a Risk, Capacity Building, and Organizational Transformation Specialist, warns that the lack of effective risk management has left banks with inadequate capital buffers. “Losses are expected to deplete most of the capital, and the fact that we have not yet seen failing financial institutions only means that some weak banks are being protected at a price the local economy cannot afford.”

Fheili emphasizes the need for a renewed focus on Pillar 2 of the Basel Accord, which provides a framework for dealing with systemic risk, pension risk, concentration risk, strategic risk, reputational risk, liquidity risk, and legal risk.

• Banks can review their risk management system.
• The Internal Capital Adequacy Assessment Process (ICAAP) is the true test of the effectiveness of a bank’s risk management function.

Urgent Need for Action

Fheili emphasizes that the wait-and-see attitude, blame game, and lack of action by all parties involved will prove detrimental to the rescue and recovery efforts. “What must stand strong and show strength in weathering the storm is the banking system, but not necessarily every individual bank.”

Conclusion

The local regulatory authorities have fallen short of taking decisive corrective actions when not in compliance with regulations. It is time for them to step up and demonstrate their commitment to maintaining a healthy and resilient banking sector.