The global economic recovery is losing momentum, and the effects of rising interest rates in major economies are increasingly being felt, Klaas Knot, the chair of the Financial Stability Board, said in a letter to G20 leaders this week. In his letter, Knot said the financial system has so far remained resilient, but moving forward, it will be important for government authorities to closely monitor asset quality in those sectors most sensitive to interest rate increases—such as real estate—and to ensure that financing providers to those sectors manage their risks properly.
“The March banking sector turmoil constituted a test of the financial reforms put in place following the 2008 [global financial crisis],” Knot said. “Among other issues, it exposed vulnerabilities in individual institutions relating to poor liquidity and interest rate risk management and governance, and it reinforced the need for strong and effective supervision by authorities. It also highlighted the importance of fully and consistently implementing the Basel III framework, thereby further enhancing banking sector resilience as soon as possible.”
The FSB this week also released two annual reports on its ongoing work to enhance the resilience of the nonbank financial intermediation sector (the FSB’s term for “shadow banking”), noting “if liquidity imbalances [in NBFI]become sufficiently large and pervasive, they may give rise to financial instability.” The report highlights the FSB’s to identify “key amplifiers” that may contribute to liquidity imbalances, and develop policies to reduce excessive spikes in liquidity demand in the NBFI sector.