It may be a barely audible whisper, but global regulators appear to be quietly declaring victory, at least for now. In his letter to G20 ministers in September 2014, Financial Stability Board (FSB) chairman Mark Carney outlined a new priority.
“As we move toward the conclusion of this phase of financial reform, the FSB will adjust focus, away from the design of standards to fix the fault lines that caused the crisis and towards new and constantly evolving risks and vulnerabilities.”
Just days earlier, the US Federal Reserve announced the creation of a committee under vice-chairman Stanley Fischer, designed to identify and monitor emerging risks to financial stability in the future. Which of course poses the question: what should the FSB and the Fed be looking at if they are to spot the next crisis?
The obvious answer is data. The global and fast-moving nature of financial markets is precisely the reason why contagion can be transmitted so rapidly. To know where the risks are, regulators need to follow the money. But this, as Mr Carney also mentioned in his letter, is a post-crisis initiative that is lagging behind. The FSB identified 25 depositories collecting trade data in 11 jurisdictions. Each of them has useful information, but the work to aggregate it all into a standardised format and eliminate double-counting, let alone to analyse the data, has only just started.
There is a second potential answer: rapid change. The dramatic rise of subprime securitisation in the mid-2000s was a warning sign that went unheeded by regulators. So what is changing fast at the moment? Regulation itself is perhaps top of the list. This has prompted the expectation that risks will move from increasingly regulated banks into so-called shadow banking – market-based activities.
In developed markets, the transition seems rather sedate, mainly because demand for credit is weak in any case. But the Bank for International Settlements’ (BIS) latest quarterly review suggests that more credit-hungry emerging markets have been ramping up bond market borrowing in foreign currencies, creating higher leverage and currency mismatches. The FSB, BIS and IMF penned a joint letter to the G20 flagging this as an alarming nexus of the two key challenges – fast-growing corporate cross-border exposures are also an area where regulators are short of data. Let us hope that this is the first step for regulators to identify and tackle the emerging risk of another crisis.
