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AMSTERDAM — The global financial system needs a “massive adjustment” to cope with higher interest rates, and key rules will need to be reviewed, according to a leading global regulator.
Klaas Knot, chairman of the Financial Stability Board, an international standards body, told POLITICO that rising interest rates are fueling problems for several U.S. regional banks and that similar losses could occur elsewhere.
“The speed at which interest rates have changed, of course that implies a massive adjustment of the financial system,” the Dutchman said in an interview from his office in Amsterdam. He added that it was unclear exactly where those losses would be.
“In many, many places in the financial system, this adjustment will go well because it was well anticipated and well managed. But history teaches us that this is not always the case everywhere.
The warning of potential problems ahead echoes fears of other global officials and comes after the bankruptcy of Silicon Valley Bank, a $200bn tech lender, sparked contagion in regional banks Americans. The ensuing market panic helped bring down Credit Suisse in Europe, forcing the Swiss government to hastily merge the lender with UBS.
Any domino effect can have enormous repercussions on the economy, businesses and households.
“We’ve seen the impact of rapidly changing interest rates play out in the second tier of US regional banks,” Knot said. “But I would be very surprised if that was the only sub-sector of the financial system where you would have a significant impact.
Despite the turmoil, Knot said he was most concerned about the hidden risks in “non-banks” – a term that encompasses investment funds, insurers, private equity, pension funds and mutual funds. speculative – where authorities have less visibility into hidden losses.
“If they’re hidden for a very long time, sometimes the problem becomes so big that it only becomes visible or noticeable when it’s too big to deal with,” he said.
The FSB boss pointed to financial players who took the wrong side of an interest rate bet and could now face losses. “I hope, of course, that this is well distributed in the financial sector,” he said. “What worries us are the specific concentrations of this risk.”
In particular, he said, those losses could be magnified when there is a mismatch between hard-to-sell assets and easy withdrawals, and borrowed money is used to maximize returns.
That combination has worried authorities for some time — but Knot said that didn’t mean regulators were behind the times. For example, the FSB, whose members include central bankers, financial regulators and ministries of finance, will issue recommendations for open-ended investment funds in July.
According to the plans, regulators would have more powers to trigger restrictions in the event of a crisis, rather than leaving those decisions in the hands of the fund manager.
Rewrite the rules
The financial regulations will have to be thoroughly reviewed in the light of recent events, he said.
“It is a mistake to see the regulatory framework as something fixed, and something that should not be touched,” he said. “The financial sector is not at all set in stone, it is constantly evolving. Thus, the regulatory framework should evolve with the evolution of risks.”
The Dutchman said this means revisiting assumptions about how quickly banks can sell assets to meet depositor withdrawals, how quickly these withdrawals will occur in the digital age, and what reserves need to be built up to cover losses. unrealized potential from interest rate risks – all of which have been factors in the US banking meltdowns.