The BoE Governor Mark Carney spoke at the Institute of International Finance (IIF) Spring Membership Meeting in Tokyo. He highlighted that capital flow volatility is rising because of the fundamental asymmetry in the international monetary financial system and the rapid rise of market-based finance. The IIF, with its diverse and global membership, can make a major contribution in addressing these issues. He also outlined the ongoing regulatory work to address systemic risks for non-banks.
Mr. Carney noted that over half of investment funds have a structural mismatch between the frequency with which they offer redemptions and the time it would take them to liquidate their assets. Under stress they may need to fire-sell assets, magnifying market adjustments and triggering further redemptions. Two-third of investment funds with structural mismatches are domiciled in the U.S. and Europe; therefore, as is the case for banks, ensuring that leverage and liquidity risks are managed in funds investing abroad is both a national asset and a global public good. System-wide stress simulations are currently being developed, including at the BoE, to assess these risks. Authorities are beginning to consider macro-prudential policy tools to guard against the build-up of systemic risks in non-banks.
Furthermore, regulators have far less sight of risks within funds compared to the core banking system, particularly synthetic leverage arising from funds’ use of derivatives. The upcoming FSB-IOSCO evaluation of implementation and effectiveness of recommendations to address liquidity mismatch in funds will be crucial to improve the understanding of best practices, including the merits of adjustments to redemption periods to be more consistent with investments. Mr. Carney noted that better surveillance, a more resilient core of the financial system, and a macro-prudential approach to market-based finance will all help increase sustainable capital flows, but they will be most effective if they are underpinned by an adequate global financial safety net.
Pooling resources at the IMF is much more efficient than individual countries self-insuring against Capital Flows-at-Risk, distributing the costs across all 189-member countries. The design of the global financial safety net is also important. Positive steps have been taken in recent years by introducing precautionary liquidity facilities to allow countries to borrow to prevent crises and mitigate their impact. This should also reduce stigma of drawing on the facilities. However, so far, only a few countries have taken them up. The BoE Governor concluded that "we are all responsible for addressing the fault lines in the global financial system and its safety net." Doing so will reduce the volatility of capital flows, increase the sustainability of cross-border investment, and meet the great challenges of this age.
Keywords: Europe, UK, Banking, Securities, Systemic Risk, Stress Testing, Capital Flow Volatility, Market Based Finance, Liquidity Risk, Macro-Prudential Approach, BoE
Previous ArticleRBI Statement on Measures to Strengthen Regulation and Supervision
EC published Regulation 2021/25 that addresses amendments related to the financial reporting consequences of replacement of the existing interest rate benchmarks with alternative reference rates.
BIS published a bulletin, or a note, that examines the cyber threat landscape in the context of the pandemic and discusses policies to reduce risks to financial stability.
HM Treasury, also known as HMT, has updated the table containing the list of the equivalence decisions that came into effect in UK at the end of the transition period of its withdrawal from EU.
EBA published an erratum for technical package on phase 1 of the reporting framework 3.0.
APRA updated a frequently asked question (FAQ), for authorized deposit-taking institutions, on the measurement of credit risk weighted assets.
EBA published the quarterly risk dashboard, along with the results of the Risk Assessment Questionnaire survey among 60 banks and 15 market analysts.
ECB concluded the public consultation on the introduction of a digital euro in EU.
ECB published a guide that sets out the supervisory approach to consolidation in the banking sector.
The SRB Chair Elke König published an article setting out work priorities for 2021.
FDIC has selected 11 technology companies—including BearingPoint, Fed Reporter, Inc, and S&P Global Market Intelligence, LLC—for inclusion in the third and final phase of the rapid prototyping competition.