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The world’s most powerful financial watchdog has warned global leaders that financial markets could face “further stress” in the coming months as high interest rates undermine the economic recovery and threaten key sectors such as real estate.
The Financial Stability Board, a Basel-based body made up of central bankers, finance ministers and regulators, offered its take on the global outlook in a letter to the G20 leaders who gathered in New Delhi this week to seek consensus. Sobering assessment. On divisive issues like the war in Ukraine and climate change.
Financial markets have been relatively stable in recent months, a welcome respite after a series of crises this year that have roiled mid-sized U.S. banks such as Silicon Valley Bank and Signature and driven Europe’s Credit Suisse into bankruptcy , which was merged into Swiss rival UBS. .
But Klaas Nott, chair of the Financial Stability Board and governor of the Dutch central bank, said risks to the financial system remained evident despite limited contagion from the events of February and March.
“As higher debt servicing costs continue to filter through the economy, financial markets will come under further stress in the coming months,” he said in a regular update to G20 leaders.
“The global economic recovery is losing steam and the effects of rising interest rates in major economies are becoming increasingly apparent,” Knott said. He stressed that given housing’s vulnerability to rate hikes, authorities should “closely monitor” the housing sector for signs of stress, urging “Financial providers in these industries manage risk appropriately”.
Higher interest rates take time to fully pass through to the real economy because some borrowers hold fixed-rate loans that were set before central banks such as the Federal Reserve, European Central Bank and Bank of England began tightening monetary policy in response to surging inflation. After Russia invaded Ukraine.
Knott said the potential for further market pressure highlighted the need for a “full and consistent” implementation of global bank capital rules agreed by regulators in 2017 and to take effect in 2023.
He also pointed to the need for tighter regulation of non-bank financial institutions – from private credit to hedge funds and insurance companies – and said it was “critical” to implement agreed reforms to address risks in these markets. Regions have moved at different speeds with regard to measures to regulate non-bank financial institutions, including regulations on money market funds, open-end funds, margins, leverage, and bond market liquidity.
The U.S. announced in July that it would not implement a bank capital regime until mid-2025, about six months after the European Union and the U.K., which themselves have announced delays to give banks more time to adapt to the new regime.
While the plan has been widely described as the “endgame” of post-global financial crisis regulation, policymakers are already considering another set of improvements to address some of the loopholes that have been exposed this year. The Financial Times reported that the measures included tightening capital and liquidity rules and forcing the US to adopt globally agreed measures against a wider range of banks.
Knott said the Financial Stability Board would soon publish a report on “lessons learned” from this year’s banking crisis and “policy priorities going forward”.
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