Head of Risk Management: What is the biggest risk for your bank right now over there in Lagos? Yes, the typical ones remain, including fraud, asset quality, defaults, etc. But add this one: ease of fund withdrawal using apps.
In the last few weeks, three banks have collapsed in the United States, not because they were really bad banks, but because depositors panicked, and moved money out of them at scale. What happened to them would not have materialized 20 years ago when our phones were not bank branches. But today, the game has changed. Indeed, the frictions banks have worked to fix, improving customer experiences, are now some of the weakest links in banking risk management. This is a mild poison pill; you built it, and now, it is a problem, especially for smaller banks. The mean time to react over bad press or panic is shorter!
First Republic Bank in the United States collapsed after customers withdrew billions of dollars in weeks.
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The bank’s earnings report revealed it had lost $100 billion in deposits in the first quarter (Q1) of 2023. This was fueled in part by panic among clients of regional banks due to the failures of SVB and Signature Bank. First Republic’s quarter-over-quarter deposits had dropped by more than 40 percent to $104.5 billion.
Simply, if you mess up, depositors can panic and move cash out using their phones before you realize what is happening. Unlike in the past where you could deploy fewer tellers to manage the withdrawals, if you try to clamp on the app-based withdrawal, you will even trigger more panic.
Nothing to regret because that pill was necessary and it has a mild effect. But you need to be alert all the time even as you improve your risk management model. But the message is clear: banks can easily collapse these days than in the past as information asymmetry has been largely removed, making it possible to know what is happening – and with branches in pockets, risk managers cannot sleep.
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Well, bank run is a bit tougher in Nigeria, once there is panic withdrawal, both the digital and physical service channels will get ‘disabled’, without anyone explaining anything to you…
On the whole, our banks are small, the economy has enough buffer outside the banking system; our system is decoupled by default.