Global financial regulator calls for tougher rules after bank panic

The global finance system’s top regulator has urged officials to “learn lessons” from the recent banking turmoil, saying the latest stresses were a reminder that financial stability is “not merely an abstract concept”.

Klaas Knot, chair of the Financial Stability Board, wrote in a letter published on Wednesday that the need to tighten rules in response to the panic was “all the greater” because, unlike other recent shocks to the global economy, such as the war in Ukraine and the coronavirus pandemic, “this latest episode had its origins within the financial system”.

Knot, who is also president of the Dutch central bank, called out “bank prudential and resolution frameworks” as one area of policy work, without giving further details.

Pablo Hernández de Cos, chair of the Basel Committee for Banking Supervision which sets the global banking rule book, said changes to liquidity requirements would be an area in focus as the committee “considers the implications of recent events”, but stressed that regulation alone was not the answer.

“The boards and management of banks should be the first port of call in managing and overseeing risks; these functions cannot be outsourced to supervisors,” said Hernández, who is also governor of the Bank of Spain, in a speech on Thursday.

The comments from two of the most influential voices in financial regulation follow the rescue and takeover of Credit Suisse on March 19, the first time an institution subject to the highest level of capital requirements has gone bust since the global financial crisis.

Concerns over the stability of US regional banks increased following the collapse of Silicon Valley Bank, which revealed gaping holes in how US lenders with less than $250bn in assets are overseen.

Officials needed to “remain vigilant” as rising interest rates, market volatility and tighter liquidity had triggered a “more challenging” outlook, said Knot. It was “essential for the smooth provision of credit, payment and other financial services to the economy” for finance ministers and governors to take the risks to financial stability seriously.

Hernández said that while tighter liquidity rules would not be enough to prevent “future bank stresses”, they would help “reduce the likelihood and impact of such events”. The Basel committee boss also hinted at a stricter approach to how global banking rules are applied, stressing that its guidance around “proportionate” regulation for smaller banks should mean “more conservative” constraints for that group.

The US exempted small and midsized banks from global standards under the Trump administration, a move that was seen as a key contributor to SVB’s collapse.

Financial regulation is a key focus of central bank governors and finance ministers as they gather at the spring meetings of the IMF and World Bank in Washington this week.

Resolution frameworks, which allow banks to be wound down with minimal disruption and without bailouts, were one of the key policy tools developed in the aftermath of the financial crisis.

However, Switzerland chose not to use Credit Suisse’s internationally agreed plan when the bank ran into difficulty, instead orchestrating a shotgun marriage with Swiss rival UBS. While SVB was not covered by resolution, the US’s decision to guarantee deposits above the $250,000 level covered by a federal scheme flew in the face of post-crisis policies on how to handle failing banks, prompting outrage from some foreign regulators.

Knot defended the post-crisis reforms, claiming that without those measures “the stress faced by individual banks could have led to broader contagion within the financial system”.

“Still individual institutions can fail, particularly when weaker business models and risk management capabilities are exposed, as they were recently by tighter financial conditions and liquidity challenges,” he added.

Knot also stressed that while recent events could lead to some “reprioritisation” of the FSB’s work, it was “committed” to projects already in train around crypto regulation, shadow banking, climate change and cross-border payments.