Banking regulators have yet to come to grips with the risk of runs on bank deposits in the digital era, with the threat of online banks suffering large deposit losses much faster than traditional bricks-and-mortar banks. Reaching a consensus on how to guard against that risk will likely be tough, says Fitch Ratings.
In a new report, the rating agency said a recent proposal from India’s central bank to revise liquidity requirements to account for the rise of online and mobile banking highlights the divergence among global regulators on how to deal with the financial stability risks posed by digital banking.
“Outside of India, few authorities have issued specific reform proposals yet to address the challenges posed by increasingly digitalized banking during liquidity stress situations,” it said.
These risks were showcased in early 2023, when several U.S. banks along with Swiss giant Credit Suisse failed amid rapid deposit withdrawals.
In the wake of that episode, certain authorities have supported a review of liquidity regulation by the Basel Committee on Banking Supervision, while others have called for a focus on the crisis management regime, Fitch noted.
“Global bank regulators are discussing whether changes are warranted to liquidity regulation and supervision regimes, or to crisis management frameworks, in terms of the provision of liquidity and resolution tools,” it said.
Fitch said it expects that most regulators will wait for the Basel Committee to issue its views on the subject before adopting specific reforms.
In the meantime, regulators “will rely on tougher supervision, including stress testing, to address the additional risks posed to liquidity coverage by digitally enabled banking,” it said.
“Forging a consensus to address the issue under the Basel Committee standard-setting process is likely to be challenging given different views among regulators on how to tackle such risks,” it said.