G20 watchdog in step-by-step approach to fund industry ‘vulnerabilities’

LONDON, Nov 10 (Reuters) – Systemic vulnerabilities in investment funds and other “non-banks” which make up nearly half of the global financial system will be addressed by amending existing rules before assessing whether more drastic action is needed. needed, a G20 watchdog said on Thursday.

Central banks had to inject liquidity when money market funds struggled as economies stalled in March 2020.

There was also central bank intervention in Britain in September when liability-focused investment funds struggled to meet collateral calls, prompting the Bank of England to consider a unilateral action in non-banks until global efforts catch up.

The collapse of investment house Archegos has also drawn attention to “hidden leverage” in the vast non-banking financial intermediation (NBFI) sector, according to a report and policy proposals from the Board of Trustees. G20 financial stability Thursday.

“The policy proposals largely involve reorienting existing policy tools rather than creating new ones,” says the FSB report, sent to G20 leaders ahead of their meeting next week.

“The FSB will in due course assess whether repurposing these tools is sufficient to address systemic risk in the NBFI, including the need to develop additional tools for use by authorities.”

Non-Bank FSB Chart November 2022

The sharp rise in interest rates and the impending recession underscore the need for careful consideration of non-banks, which include hedge funds, pension funds and insurers.

The FSB presented proposals for inventories of existing rules and regulatory guidance in the non-banking sector up to 2023 and beyond to better prepare the sector to face an increase in demand for liquidity so that the intervention of the central bank is a “backstop” and not a “frontstop”.

It does not have the power to impose rules but its members – regulators, central banks and treasury officials from G20 economies – commit to implementing finalized policies.

The caution reflects the need to see if the FSB’s recommendations made a year ago on money market funds make a difference, and the complexities of regulating an industry that has many ties to banks, clearing and markets – and the regulatory debate about how far to go.

FSB says needed to ensure non-banks have enough cash to meet large margin calls in times of crisis by ironing out ‘mismatches’ between repayment periods and type of assets held in the fund, while making better use of industry data.

“The main objective of the proposals is to reduce peaks in demand for liquidity, to improve the resilience of liquidity supply in the event of stress and to improve the monitoring of risks and the preparedness of authorities and market participants. “, said the FSB.

“Finally, the FSB will consider further promoting the use of fund-level and system-level stress testing.”

Reporting by Huw Jones; Editing by Alex Richardson

Our standards: The Thomson Reuters Trust Principles.