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The world’s most powerful financial regulator warned of “further challenges and shocks” in the coming months as high interest rates undermine the economic recovery and threaten key sectors like real estate.
In his regular update to G20 leaders ahead of their New Delhi summit this week, Klaas Knot, chair of the Basel-based Financial Stability Board, said: “The global economic recovery is losing momentum and the impact of interest rate hikes is being felt .” The major economies are increasingly being felt.”
“The global financial system will certainly face further challenges and shocks in the coming months and years,” he added.
Financial markets have been relatively resilient in recent months, a welcome respite from a spate of crises this year that battered mid-tier US lenders like Silicon Valley Bank and Signature and spelled the demise of Europe’s Credit Suisse, which is based in its Swiss rivals incorporated into UBS.
However, Knot said that the risks in the financial system are still evident, even if the risk of contagion was limited by the events in February and March.
He highlighted the real estate sector as an area that authorities should “monitor closely for signs of stress” given its vulnerability to rate hikes, and urged “financial service providers in these sectors to properly manage their risks.”
Higher interest rates will take time to fully feed through to the real economy, as some borrowers receive fixed-rate loans before central banks like the US Federal Reserve, European Central Bank and Bank of England have started tightening monetary policy to combat rising inflation .
Knot said the potential for further market stress underscores the need for “full and consistent” implementation of the global capital rules for banks agreed by regulators in 2017, due to come into effect by 2023.
He also pointed to the need for tighter regulation of non-bank financial institutions – ranging from personal loans to hedge funds to insurance – and said it was “vital” to implement agreed reforms to address the risks in these markets.
Measures to regulate NBFIs, including rules on money market funds, open-ended funds, margins, leverage and bond market liquidity, have been implemented at different speeds across regions.
The US announced in July that it would not implement the bank capital regime until mid-2025, some six months later than the EU and UK, which had themselves announced delays to give banks more time to adapt to the new one adjust regulation.
While the package has been widely described as the “endgame” for regulation in the wake of the global financial crisis, policymakers are already considering a range of other improvements to address some of the weaknesses uncovered this year.
The FT reported that these measures included a tightening of capital and liquidity rules and a US commitment to apply globally agreed measures to a wider range of banks.
Knot said the FSB would soon publish a report on “lessons learned” from this year’s banking crises and “policy priorities for the future”.
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