LONDON, Oct 19 (Reuters) – A decade after the global financial crisis, non-banks are still not properly regulated as skyrocketing interest rates point to new vulnerabilities such as emerging market funds, Jon Cunliffe, deputy governor of the Bank of England, said Wednesday.
Liability driven investment funds (LDI) in the UK were forced by regulators to build their liquidity defenses last week after the Bank of England had to buy UK government bonds to avoid the funds collapsing due to a rise in gilt yields.
Cunliffe warned further tensions could arise as global financial markets brace for a rapid rise in interest rates, with “vulnerabilities” predominating among non-banks such as leveraged funds.
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“The areas where I would see stress, where you might see stress, are emerging markets, particularly with the strength of the dollar, and emerging market bond funds,” Cunliffe told the Treasury Select Committee.
The global financial crisis prompted regulators to tighten capital requirements for banks, but disagreements between central banks, which focus on financial stability, and securities regulators stymied early efforts to regulate “shadow” or non-banks, such as various types of mutual funds .
The fund industry has also campaigned hard to stop more stringent types of regulation, such as B. Requirements to hold much larger liquidity buffers or capital reserves.
On financial stability issues around the world, there is a gap between the powers of financial stability authorities and the data they can see about non-banks, Cunliffe said.
Without coordinated global action, it would be difficult for a legal order to make changes in such a cross-border sector.
Cunliffe said the banking system is now resilient to significant stress, but unbanked financing is not as resilient to liquidity issues as it has been with LDI and during the COVID-19 pandemic.
Central banks had to inject liquidity into markets to avoid freezing money market funds when economies went into lockdown in March 2020.
“I actually think there needs to be more attention paid to financial stability and macroprudential issues between authorities like the Bank of England and the securities regulators who are responsible for these markets,” Cunliffe said.
Cunliffe said bank and non-bank stress tests may also need to be tougher and beyond the magnitude of historical shocks given what has happened to markets during COVID and to LDI.
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Reporting by Huw Jones Editing by Bernadette Baum
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