Top regulator eyes tighter rules for global financial system

The head of the world’s top financial regulator has called for tighter rules to clamp down on risks spreading from so-called “shadow banks” to other parts of the banking system.

Pablo Hernández de Cos, chair of the Basel Committee on Banking Supervision, said on Friday that events of recent years highlighted the dangers of the close links between shadow banks, such as funds and insurers, and regular lenders.

“The market turmoil in March 2020, idiosyncratic episodes of distress and margin dynamics have highlighted how these channels of interconnections . . . can pose risks to banks,” he said.

While “great progress” had been made in making banks more resilient, rules governing the links between lenders and shadow banks, officially known as non-bank financial intermediaries (NBFIs), may not be “sufficient”.

He signalled there may be a need for additional measures “aimed at mitigating risks to the banking system from interconnections with NBFIs”.

Hernández said the remarks were his “personal views” and not those of the committee. They follow a month of turmoil in the banking sector, which has led to the failure of three US lenders including Silicon Valley Bank and the collapse of Credit Suisse into the arms of UBS.

Hernández reiterated the committee’s calls for banks and supervisors to be “vigilant” and to closely monitor the “financial stability risks of higher interest rates to the global banking system”.

“As central banks raise interest rates to combat inflation, borrowers are now facing sharply rising debt service burdens,” said Hernández, who is also governor of Spain’s central bank. “A broad-based repricing in asset markets could also expose banks to additional risks and new risk management challenges.”

The Financial Stability Board, which brings together top policymakers, called in December for “urgent work” to address gaping holes in regimes to deal with failing NBFIs, such as clearing houses and insurers, whose operations stretch across borders.

Hernández said a second area “that could potentially benefit from further global work” are the limits on mortgage lending applied by many regulators around the world to restrict how much banks can lend in relation to the value of property or a borrower’s income.

“While these homegrown measures have generally worked well and committee members have been sharing approaches and experiences, the question is whether benefits would accrue from a common set of global principles for designing and operationalising such measures?” he said.

Basel Committee members met in Hong Kong this week to discuss recent market developments. The global rule-setter, best known for ramping up banks’ capital and liquidity requirements after the 2008 financial crisis, said it had “agreed to take stock of the regulatory and supervisory implications stemming from recent events, with a view to learn lessons”.

The turmoil has led other regulators to put forward fresh ideas for supervising the global financial system. Claude Wampach, a Luxembourg-based member of the Basel Committee, told the Financial Times that one area regulators might look at is whether the liquidity coverage ratio was “sufficiently calibrated”. 

The ratio requires banks to hold enough assets that are easy to sell quickly like government bonds to meet likely deposit outflows during a crisis. The only way to entirely prevent a bank run would be to require them to keep all of their deposits in highly liquid assets, Wampach said, “but then you wouldn’t have banks any more”.