On Wednesday (12/4), the internal G20 team said that regulations introduced after the global financial crisis had prevented the spread of the latest banking sector turmoil. However, caution is still necessary as the outlook becomes more challenging.
Following taxpayers bailing out lenders during the 2007-2009 crisis, the Financial Stability Board (FSB) issued rules on how to better capitalize banks and how to resolve or halt crises quickly without public assistance.
Quoting Bloomberg (12/4/2023), regulators’ willingness to implement rules was tested last month when US authorities dealt with the collapse of Silicon Valley Bank and Swiss-engineered takeover of Credit Suisse by UBS.
FSB Chairman Klaas Knot also said that swift and effective action by Swiss, US, and other jurisdictions’ authorities can maintain global financial stability and banking sector contagion.
“Without these reforms, the pressure faced by each bank could lead to wider contagion in the financial system,” Knot said as quoted by Bloomberg.
Knot himself also said that the prospects for financial stability are becoming more challenging, and financial authorities need to learn from and follow up on lessons.
The FSB has highlighted vulnerabilities related to high debt levels, business models based on low-interest rate assumptions, widened asset valuations, and a combination of leverage and liquidity mismatches in non-bank financial intermediation (NBFI).
Knot, who also heads the Dutch central bank, also said that these vulnerabilities are sensitive to rising interest rates and slowing economies.
“Therefore, authorities should remain vigilant about the evolving prospects. In the coming months, the FSB will carefully analyze recent events to learn from them,” he said.
Knot also explained that although some other FSB work may need to be reprioritized to implement lessons from banking turmoil, the board remains committed to assigning work on crypto assets, non-bank financial institutions (NBFI), and climate change.
In summary, the internal G20 team has praised the regulations put in place after the global financial crisis, stating that they have prevented the recent turmoil from spreading to the wider financial system.
However, caution is still needed as the outlook for financial stability becomes more challenging. Chairman Knot emphasized the need for vigilance, especially regarding high debt levels, low-interest rate assumptions, and liquidity mismatches in non-bank financial intermediation. The FSB remains committed to assigning work on crypto assets, NBFI, and climate change.
