Financial regulators tell G20 to focus on legal gaps
Bank regulators are better prepared to cope with the potential failure of a major bank but more work needs to be done on the finer detail of legal agreements covering bank resolution and derivatives trade reporting, the Financial Stability Board said.
The FSB set out its views on how the reforms introduced after the collapse of Lehman Brothers nearly eight years ago in a second annual report to the G20 countries, whose leaders are meeting next week in Hangzhou, China.
“This significant progress must not lead to complacency,” said Mark Carney, governor of the Bank of England and chairman of the FSB. “Our priorities must be to implement our past agreements in a full, timely and consistent manner.”
The organisation singled out the European Union as a jurisdiction which had deviated from the intended rules in its application of the Basel III bank capital framework. The FSB report called on G20 leaders to ensure such rules were implemented on a more even basis.
It said it was disappointing only half of the 30 global systemically important banks (G-SIB) had produced cooperation agreements with regulatory authorities in countries beyond their home jurisdiction about how to wind down the bank in the event of its failure, or resolve its difficulties.
Only two banks had produced these vital agreements over the last year. “Effective resolution planning and the orderly resolution of a cross-border bank require national authorities to have legal powers and efficient processes for sharing information,” said the report.
Cooperation agreements can aid this, by setting out how foreign resolution actions, from the country where a major bank is headquartered, can be swiftly and legally implemented. Each G-SIB should already have a firm-specific crisis management group as well.
For derivatives trading, more attention needs to be paid to margin requirements, where progress is “behind schedule”, the report said. It also said “significant work is still needed to ensure trade reporting is effective”.
The other main aspect of the global financial reforms to be addressed was shadow banking, where the report said regulation remained at a relatively early stage and more work was needed “to address and respond to potential financial stability risks in this area”.
The report also highlighted three other areas it had analysed to see if the reforms had led to unintended consequences.
The first was market liquidity. The FSB said there was evidence that liquidity had reduced in certain sovereign and corporate bond markets, but said there was “limited evidence” of a broad deterioration across all markets. It pledged to look at the issue in more depth.
The other two areas – emerging markets and the maintenance of an open and integrated global financial system – were not considered problematic.
“The reforms appear to have helped avoid significant retrenchment and market fragmentation, which were common features of past financial crises,” said the report.
Carney highlighted how the markets took Brexit in their stride. “The financial sector is now more likely to dampen shocks rather than amplify them,” he said.
Source: Reuters
