US bank failures Spring 2023 : Part Two: Real risks, (mis)diagnoses, (mis)recommendations

Király, Júlia and Mikolasek, András (2023) US bank failures Spring 2023 : Part Two: Real risks, (mis)diagnoses, (mis)recommendations. ECONOMY AND FINANCE: ENGLISH-LANGUAGE EDITION OF GAZDASÁG ÉS PÉNZÜGY, 10 (4). pp. 292-320. ISSN 2415-9379

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Abstract

In March 2023, a banking panic hit the US market and affected Europe. The panic proved short-lived with no lasting real economic consequences, which would justify a complete overhaul of the current banking model. In the first part of our study, we set out the details of the three selected US banks’ paths to failure. In the current second part, we analyse the three cases by digging deeper into the risks for banks. We show that the sophisticated risk indicators could not reliably predict such a panic and its consequences. Rather, it was the banks’ flawed business models and corporate and risk management cultures that played a key role in the failure, and their inability to manage the risks arising from rapid growth and interconnected customer networks. Future supervisory investigations need to focus on this rather than mechanical indicator analysis.

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