Investment funds need bank-like shock-absorbers, BIS says

The tower of the headquarters of the Financial institution for Worldwide Settlements (BIS) is seen in Basel, Switzerland March 18, 2021. REUTERS/Arnd Wiegmann

LONDON, Dec 6 (Reuters) – Financial institution-like guidelines are wanted to cease funding funds from destabilising finance in market crises, the Financial institution for Worldwide Settlements stated on Monday, including gasoline to an already heated debate over the quick rising sector.

The BIS, a Swiss-based discussion board for central banks, stated in its quarterly overview that policymakers danger falling behind the curve in regulating “non-banks”, which comprise hedge funds, mutual funds, cash market funds, pension funds and insurance coverage firms, collectively accounting for half of world monetary exercise.

As soon as dubbed shadow banks and now classed as non-bank monetary intermediaries (NBFIs), they’ve grown quickly to fill the area left by the withdrawal of extra closely regulated banks to ease capital necessities.

“A systemic method to regulating NBFIs is the important thing to higher addressing their structural vulnerabilities, notably liquidity mismatches and hidden leverage, and constructing satisfactory shock-absorbing capability,” the BIS overview stated.

“When leverage is a matter, much less stress-sensitive margining practices and, above all, increased and usable capital buffers will assist.”

Not for the primary time, central banks needed to inject liquidity into markets in March 2020 to keep away from cash market funds from freezing when economies went into COVID-19 lockdowns.

“Such repeated occurrences counsel that the established order is unacceptable,” BIS Basic Supervisor Agustin Carstens stated within the overview.

“Elementary changes to the regulatory framework for NBFIs are referred to as for, to make it totally match for function.”

The funds trade is vocal in its opposition to being regulated like banks, saying there have been stresses all through the monetary system final yr and that heavy guidelines would make a few of them unviable.

However international regulators have already set out suggestions for cash market funds, and the BIS intervention will form present deliberations amongst central banks and securities watchdogs over what measures, if any, are wanted for the broader NBFI sector.

The BIS stated the sector wants “macroprudential” guidelines which banks have already got, resembling increased liquidity buffers, to defend the monetary system from market squeezes.

“Given the rising position that the NBFI sector performs available in the market ecosystem, it’s now necessary to use a macroprudential method to it as properly,” the BIS overview stated.

“The final word goal is to construct particular person NBFIs’ conflict chests in good occasions with a purpose to mitigate collective retrenchment in occasions of stress.”

Reporting by Huw Jones; Enhancing by Angus MacSwan

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