Daily Management Review

G20 Watchdog Digs Deeper into Markets and says Bank Rules Working Well


G20 Watchdog Digs Deeper into Markets and says Bank Rules Working Well
A global watchdog said on Wednesday that the benefits of rules introduced since the 2008 collapse of Lehman Brothers bank can be seen in the financial system's ability to cope with Britain's vote to leave the European Union and with doubts over growth prospects.
Rules forcing lenders to hold more capital since the collapse of Lehman Brothers triggered a financial crisis were introduced by the Financial Stability Board (FSB), which coordinates financial regulation across the Group of 20 (G20) economies.
"Events this year have shown that the work to fix the fault lines that led to the financial crisis is paying off and is now helping to support strong, sustainable and balanced growth. As implementation progresses, the financial sector is increasingly absorbing shocks rather than amplifying them," FSB chairman Mark Carney said in a letter to G20 leaders who meet in China this weekend.
However, more work is on the cards.
Following incident where banks have been fined billions of dollars for attempting to rig interest rate benchmarks and currency markets, the board would make recommendations in early 2017 to reduce misconduct, Carney said.
Regulatory issues that "merit policy attention" in the financial technology or fintech sector would also be highlighted next year by the FSB.
Studies about whether rules introduced so far have had unintended effects have already been done by the FSB. Holding the inventories of bonds needed to buy or sell at all times to keep markets "liquid" have been criticized to be uneconomic by the banks.
While saying that the FSB would dig deeper into the growing use of platforms to trade bonds, and the use of computerized trading, Carney said that there was limited evidence that new rules had harmed liquidity in normal times.
The repo or repurchase agreement markets, used for day-to-day funding and a key element of liquidity and are a form of short-term borrowing backed by government bonds, would also be studied by it.
The remaining elements in Basel III, the world's core regulatory response to the financial crisis, would be urged by the banks to be watered down as they try and persuade regulators to do so when they meet on Friday. Dubbed as Basel IV by the lenders, these elements amount to a big increase in capital requirements is unchanged, they say.
When they complete the work by year end, the regulators are committed to not significantly increasing overall capital requirements across the banking sector, reiterated Carney, who is also governor of the Bank of England.

While admitting that substantial work remained to be done before regulators could close a big cross-border bank in trouble without triggering market upheavals, it said that the FSB reforms aim to stop banks from being "too big to fail".
The FSB said that only half of the world's 30 top banks and two of the biggest insurers are covered by the full cooperation agreements with the regulators.
The board would develop a "simple and consistent measure of leverage" for funds by the end of 2018 and by this year end it would also finalize by year-end recommendations to introduce new liquidity rules for funds by the end of 2017, Carney said.

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