FRANKFURT (Reuters) – Shortly before their summit in India, the global stability watchdogs called on the heads of state and government of the G20 countries to be more vigilant in view of increased financial risks.
The recovery of the world economy is losing momentum and the effects of the rise in interest rates in the major economies are increasingly being felt, wrote the Dutch central bank governor and head of the Financial Stability Board (FSB), Klaas Knot, in a letter to the G20 summit participants published on Tuesday. The financial system has so far remained resilient thanks to the banks’ strong capital buffers. Going forward, authorities would need to closely monitor asset quality in areas such as real estate, which are most sensitive to interest rate increases.
It is important to ensure that providers of finance in these sectors manage risk properly and remain resilient, Knot wrote in the letter. The meeting of the 20 most important industrialized and emerging countries (G20) will take place on September 9th and 10th in India’s capital New Delhi. On behalf of the G20, the FSB monitors the risks to the global financial system and coordinates the development of international standards and financial regulations.
The turbulence in the banking sector in March revealed weaknesses in individual institutions, such as inadequate liquidity and interest rate risk management and poor corporate governance. This underlined the need for strict and effective oversight by the authorities. The turmoil also challenged long-held notions about the durability of savings and the speed of bank runs. Questions also arose regarding the role of social media in such bank storms.
The collapses of the Silicon Valley Bank (SVB) and the Signature Bank in the USA in March triggered upheavals on the stock exchanges worldwide. Both regional banks had held very high proportions of unsecured deposits. Their collapse came when a loss of confidence caused customers to withdraw billions of dollars from their accounts in a short span of time. The FSB intends to publish a report shortly on the lessons to be learned from the crisis.
According to Knot, the FSB is also keeping an eye on the increasing importance of the shadow banking sector, now mostly referred to as “NBFI” (Non-Bank Financial Intermediation). Such financial firms outside of the traditional banks include hedge and money market funds, alternative investment funds and specialist exchange dealers. They now represent around half of the global financial system. They offer financing options that traditional money houses don’t cover. The risks of the sector include, among others, that their activities can amplify stock market turmoil and, in extreme cases, undermine the stability of the financial system.
It is crucial that the G20 countries implement agreed reforms to strengthen the resilience of the NBFI sector, Knot wrote in the letter. The FSB will work with the standard-setting bodies to assess in due course whether implemented reforms have adequately addressed the risks. According to Knot, it should also be looked at whether additional instruments should be developed for the supervisors.
(Report by Frank Siebelt, edited by Kerstin Dörr. If you have any questions, please contact our editorial team at [email protected] (for politics and the economy) or [email protected] (for companies and markets).)