G20 financial watchdog seeks to learn from latest banking turmoil

4:10 am Wednesday, April 12th, 2023

By Huw Jones

LONDON (Reuters) – The G20’s financial watchdog on Wednesday said rules it introduced after the global financial crisis had prevented contagion from the latest banking sector turmoil, but it would remain vigilant as the outlook has become more challenging.

After taxpayers bailed out lenders during the 2007-09 crisis, the Financial Stability Board (FSB) thrashed out rules on how to better capitalise banks, and quickly “resolve” or wind them down in a crisis without public aid, to end so-called too-big-to-fail banks.

The willingness of regulators to apply the rules was tested last month as U.S. authorities handled the collapse of Silicon Valley Bank, and Switzerland engineered UBS’s forced takeover of Credit Suisse.

Unlike other market shocks, the latest episode originated in the financial sector, and therefore “put to the test” the G20’s financial reforms, FSB Chair Klaas Knot said in a letter to G20 finance ministers and central bankers meeting in Washington.

He said “rapid and effective” actions by authorities in Switzerland, the United States and other jurisidictions maintained global financial stability.

“Without these reforms, the stress faced by individual banks could have led to broader contagion within the financial system,” Knot said.

The outlook for financial stability had become more challenging, Knot said, and the need for financial authorities to learn lessons and act upon them was “all the greater”.

The FSB said it has been highlighting vulnerabilities linked to elevated debt levels, business models based on the presumption of low interest rates, stretched asset valuations, and the combination of leverage and liquidity mismatches in non-bank financial intermediation (NBFI).

These vulnerabilities are sensitive to rising interest rates and a slowing economy, Knot said.

“Authorities must therefore remain vigilant to the evolving outlook. In the coming months, the FSB will carefully analyse recent events in order to learn from them,” said Knot, who also heads the Dutch central bank.

Although some of the FSB’s other work may need to be reprioritised to apply lessons from the banking turmoil, the board remained committed to delivering work on cryptoassets, NBFI, and climate change, Knot said.

(Reporting by Huw Jones; editing by Barbara Lewis)