Financial stability outlook challenging due to banking turmoil, says G20 watchdog

The failure of regional lenders in the US, starting with Silicon Valley Bank, followed by the crisis at storied Swiss bank Credit Suisse has forced central banks across the world to slow their monetary tightening.

The global financial stability outlook has become more challenging in recent weeks because of the turmoil in the banking sector, the G20's financial watchdog said on April 12.

“In response, rapid and effective actions have been taken by authorities in Switzerland, the United States and other jurisdictions to maintain global financial stability,” Financial Stability Board (FSB) chair Klaas Knot said in a letter to G20 finance ministers and central bank governors who are meeting on April 12-13 in Washington

“Alongside these developments, heightened volatility, reduced liquidity and large price swings emerged in key financial markets."

These events have put to the test the G20’s financial reforms that followed the 2008 global financial crisis. While the global financial system is much better placed to absorb adverse shocks as a result of these reforms, every test of financial resilience involves new challenges, the FSB chair 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,” Knot added.

The failure of regional lenders in the US, starting with Silicon Valley Bank, followed by the crisis at the storied Swiss bank Credit Suisse has forced central banks across the world to slow their monetary tightening.

The latest episode had its origins within the financial system, heightening the need for the authorities to learn lessons and act upon them, the FSB chair said.

The FSB has been highlighting vulnerabilities associated with elevated debt levels, business models based on the presumption of low and stable interest rates, stretched asset valuations, and the combination of leverage and liquidity mismatches in non-bank financial intermediation.

Each of these vulnerabilities is sensitive to a tightening of financial conditions and a slowing of economic activity, Knot wrote.

While the reforms since the global financial crisis have helped make the banking sector better able to absorb adverse shocks, individual institutions can fail, particularly when weaker business models and risk-management capabilities are exposed, as they were recently by tighter financial conditions and liquidity challenges, the letter said.

“These recent events highlight that we cannot be complacent. The speed of developments in March, the precise nature of the vulnerabilities that crystallised and the associated market reactions provide important lessons for financial authorities, including for bank prudential and resolution frameworks.”

The FSB is working closely with the Basel Committee on Banking Supervision and other standard-setting bodies to comprehensively draw out these lessons and the consequent priorities for future work.

Timely and consistent implementation of international standards remains key to bolstering global financial stability, he added.

Set up after the G20 summit in 2009, FSB promotes international financial stability by coordinating national financial authorities and international standard-setting bodies as they work towards developing strong regulatory, supervisory and other financial sector policies. It fosters a level playing field by encouraging coherent implementation of these policies across sectors and jurisdictions.