LONDON (Reuters) – Systemic vulnerabilities in investment funds and other “non-banks” that make up almost half the world’s economic system can be addressed by tweaking existing rules before assessing whether more radical motion was needed, a G20 watchdog said on Thursday.
Central banks needed to inject liquidity when money market funds bumped into difficulties as economies went into lockdown in March 2020.
There was also central bank intervention in Britain in September when liability-driven investment funds struggled to fulfill collateral calls, prompting the Bank of England to think about unilateral motion in non-banks until global efforts catch up.
The collapse of investment house Archegos also drew attention to “hidden leverage” within the vast non-bank financial intermediation (NBFI) sector, in line with a report and policy proposals from the G20’s Financial Stability Board on Thursday.
“The policy proposals involve largely repurposing existing policy tools relatively than creating latest ones,” the FSB report, sent to G20 leaders ahead of their meeting next week, said.
“The FSB will assess sooner or later whether repurposing such tools is sufficient to deal with systemic risk in NBFI, including the necessity to develop additional tools to be used by authorities.”
Graphic: FSB non-banks graphic November 2022 – https://fingfx.thomsonreuters.com/gfx/mkt/xmpjkgmzbvr/FSB%20non-banks%20graphic%20November%202022.PNG
Sharply rising rates of interest and looming recession underscore the necessity to scrutinise non-banks, which include hedge funds, pension funds and insurers.
The FSB set out proposed stocktakes of existing rules and regulatory guidance within the non-bank sector through 2023 and beyond to make the sector higher prepared to address a surge within the demand for liquidity in order that central bank intervention is a “backstop” and never a “frontstop”.
It has no power to impose rules but its members – regulators, central banks and treasury officials from G20 economies – commit to implementing finalised policies.
The caution reflects a must see if FSB recommendations made a 12 months ago on money market funds make a difference, and the complexities of regulating a sector that has many links to banks, clearing houses and markets – and regulatory debate over how far to go.
The FSB said there was a necessity to make sure non-banks have enough liquidity to fulfill big margin calls in times of crisis by ironing out ‘mismatches’ between redemption periods and sort of assets being held within the fund, together with making higher use of knowledge on the sector.
“The principal concentrate on the proposals is to cut back liquidity demand spikes, enhance the resilience of liquidity supply in stress, and enhance risk monitoring and the preparedness of authorities and market participants,” the FSB said.
“Finally, the FSB will consider further promoting the usage of fund- and system-level stress testing.”
(Reporting by Huw Jones; Editing by Alex Richardson)
Copyright 2022 Thomson Reuters.
