Regulators are looking for hidden Banking Risks
2022.12.27 11:06
Regulators are looking for hidden Banking Risks
Budrigannews.com – After British pension funds narrowly escaped disaster in 2022, regulators are eagerly searching the non-bank financial sector for hidden risks. This market, also known as shadow banking, could be worth more than $225 trillion. Finding out who is most likely to stand on the landmines is the key to stopping a crisis, not finding the landmines themselves.
At the point when UK benefits reserves were gotten short by an unexpected fall in government security costs in September, the Bank of Britain needed to send off a 65-billion-pound plan to balance out the market. It claimed that the funds would have had to liquidate investments in order to meet margin calls on their loans if it had not done so. The mortgage market’s increased borrowing costs could have rippled throughout the economy as a whole as a result of panicked bond sales. As a consequence of this, regulators all over the world, including the financial stability task force of the G20, are on high alert for any omitted leverage.
Funds for emerging markets are one place to start. Investors looked for riskier assets in markets like Indonesia, Brazil, and Mexico when interest rates were low. However, investors are less likely to venture into riskier markets for returns as U.S. interest rates rise above 4%. For instance, investors might rush to sell their holdings in emerging market funds in response to a drop in demand for a nation’s bonds and a political upheaval, resulting in rapid and unruly price drops.
A similar fire sale could also affect leveraged loans. Banks, hedge funds, and other investors were happy to back corporate takeovers with a lot of debt before the pandemic. Even though the fund’s assets might not be easy to sell, so-called open-ended funds, which make up 4% of the leveraged loan market, are a particular concern because they allow investors to demand their money back. Open-ended funds sold $14 billion worth of leveraged loans during the March 2020 market turmoil. These sales accounted for 11% of secondary market transactions and contributed to a 19% drop in prices.
However, not all market flaws call for stringent regulation. It could appear to be legit to police ventures swarmed with annuity supports whose exercises likewise impact government bond costs, however not those where misfortunes would be borne by other less interconnected financial backers. The fall of cryptocurrency exchange FTX in November is a clear illustration; Due to the fact that the majority of regulated institutions have given crypto a wide berth, it caused investor panic but spared vital businesses like banks.
Around the world, regulators are determined to stop another crisis. It is positive that they are concentrating on potential fire sales and concealed leverage. However, when stress-testing the system, it makes the most sense to know who, not just what, has the potential to cause systemic risk. Otherwise, watchdogs run the risk of attempting to regulate everything but failing miserably.
In a report released on November 10, the Financial Stability Board of the G20 made the recommendation that systemic vulnerabilities in investment funds and other “non-banks,” which make up almost half of the global financial system, should be addressed by modifying existing regulations before determining whether or not more drastic action was required.
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After some funds were required to sell government bonds in order to meet margin calls, the Bank of England announced on September 28 a 65 billion pound bond-buying scheme to stabilize the bond market.
