Investing activities that take place outside the banking system require a new set of broad-based global regulations to combat the inherent instability, the Bank for International Settlements said.
Covering around half of all global financial assets after rapid expansion over the past decade, nonbank financial intermediaries such as asset managers, hedge funds and other investment vehicles are still not adequately protected against bank-like cash withdrawals, according to Claudio Borio, chief economist at the BIS based in Basel, Switzerland.
The ‘race for money’ at the start of the pandemic last year refocused regulators’ minds on a long-standing weak spot, as panicked investors wrested more than $ 155 billion from so-called funds. first order in less than two months, helping to trigger a foreclosure in the US commercial paper market and global discounts on dollar funding. Central banks have warned that high asset prices, rising inflation and debt in many markets signal the potential for further turmoil.
After “a period of aggressive risk-taking, you have a build-up of leverage. You think the markets are liquid, when in fact, under pressure, they won’t, ”Borio said.
“You can smooth that out by creating buffers in the right times – whether it’s capital, solvency, or cash, to avoid sales sales – so that when the bad times come, you have a little more room.” for maneuver. “
The Financial Stability Board, which reports to the Group of 20 Nations, is pursuing an overhaul of global regulations for money market funds and other non-bank institutions that would seek to prevent panicked investors from withdrawing their money from these instruments. After central banks in Europe and the United States had to step in to support the sector during the 2008 financial crisis and again last year, officials are looking for a longer-term solution that would prevent this from happening again. .
“Repeated central bank interventions in these stressed markets can generate distortions as they can encourage further risk-taking,” Borio said.
“What you need to do, which has actually been done in the case of the banks, is to come up with a regulatory framework that reduces the likelihood and intensity of these stressful episodes and reduces the need for central banks to to intervene. , this framework should take a system-wide perspective.
The BIS advocates a broad regulatory discussion that would encompass sectors like those that have suffered explosions this year, such as private investments undertaken by Archegos Capital Management or commercial financing carried out by Greensill Capital. The collapse of these two companies spilled over into the formal banking system as lenders, including Credit Suisse Group, were trapped by foreclosures in opaque and poorly understood transactions.
Update: December 7, 2021, 4:30 a.m.