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Global financial regulator calls for tougher rules after bank run

The top regulator of the global financial system has urged officials to “learn lessons” from the recent banking turmoil, saying the latest strains are a reminder that financial stability is “not just an abstract concept”.

Klaas Knot, chairman of the Financial Stability Board, wrote in a letter published Wednesday that the need to tighten rules in response to the panic was “all the greater” because, unlike other recent shocks to the economy world, such as the war in Ukraine and the coronavirus pandemic, “this latest episode has its origins in the financial system”.

Knot, who is also chairman of the Dutch central bank, called “prudential and resolution frameworks for banks” an area of ​​policy work, without giving further details.

Pablo Hernández de Cos, chairman of the Basel Committee on Banking Supervision, which sets global banking regulation, said changes to liquidity requirements would be an area of ​​interest as the committee “considers the implications of recent events,” but stressed that regulation alone was not the answer.

“Bank boards and management should be the first point of contact in managing and monitoring risk; these functions cannot be outsourced to supervisors,” Hernández, who is also governor of the Bank of Spain, said in a speech Thursday.

Comments from two of the most influential voices in financial regulation follow the bailout and takeover of Credit Suisse on March 19, the first time an institution with the highest capital requirements has failed since the global financial crisis. .

Concerns about the stability of U.S. regional banks have grown following the collapse of Silicon Valley Bank, which exposed gaping holes in the way U.S. lenders with less than $250 billion in assets are supervised.

Officials needed to “remain vigilant” as rising interest rates, market volatility and tight liquidity had triggered a “more challenging” outlook, Knot said. It was “essential for the smooth delivery of credit, payments and other financial services to the economy” that finance ministers and governors take risks to financial stability seriously.

Hernández said that while stricter liquidity rules would not be enough to prevent “future banking stresses”, they would help “reduce the likelihood and impact of such events”. The Basel Committee boss also hinted at a tougher approach to enforcing global banking rules, stressing that his guidelines for “proportionate” regulation for smaller banks should mean “more conservative” constraints for that group.

The United States exempted small and medium banks from global standards under the Trump administration, a move that was seen as a key factor in SVB’s collapse.

Financial regulation is front and center for central bank governors and finance ministers at the spring meetings of the IMF and World Bank in Washington this week.

Resolution frameworks, which allow banks to be liquidated with minimal disruption and without bailouts, were one of the main policy tools developed in the aftermath of the financial crisis.

However, Switzerland opted out of Credit Suisse’s internationally agreed plan when the bank ran into difficulties, instead orchestrating a forced marriage with Swiss rival UBS. Although SVB was not covered by a resolution, the US decision to guarantee deposits above the $250,000 level covered by a federal scheme ran counter to post-crisis policies on the how to deal with failing banks, provoking outrage from some foreign regulators.

Knot defended the post-crisis reforms, saying that without these measures “the stress faced by individual banks could have led to wider contagion within the financial system”.

“Yet individual institutions can fail, particularly when weaker business models and risk management capabilities are exposed, as they have recently been exposed to by tighter financial conditions and liquidity issues,” he said. -he adds.

Knot also pointed out that while recent events might lead to some “reprioritization” of the FSB’s work, he was “engaged” in projects already underway around crypto regulation, shadow banking, climate change and cross-border payments. .

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