G20 watchdog to study Silicon Valley Bank, Credit Suisse turmoil
How rules are applied to banks and the calculation of their liquidity buffers should be reviewed following recent turmoil in the banking sector, Klaas Knot, chair of the G20’s Financial Stability Board said on Thursday.
European banking stocks plunged after the collapse of Silicon Valley (SVB) bank in the U.S. in March, creating turmoil that lead to the forced takeover of ailing Credit Suisse by UBS in Switzerland.
U.S. regulators had deemed that SVB was not a “systemic” risk and therefore not required to comply with more onerous liquidity rules under the Basel III Accord. While in Switzerland regulators chose not to resort to so-called “resolution” tools introduced after the 2008 global financial crisis for banks considered “too big to fail”.
Knot, who also heads the Dutch central bank, said the FSB has begun evaluating lessons from how the U.S. and Swiss authorities had responded to these events.
“Why did FINMA, the Swiss supervisor, use a market and not a resolution solution to enable this sale? After all, we have come a long way in improving crisis preparedness in the banking sector,” Knot told an event held by the European Banking Federation.
Regulators should also reconsider which type of banks are deemed to be systemically important and therefore come under global “Basel III” capital standards, Knot said.
“It’s not a European issue, but it is an issue in other parts of the world.” he said. “Supervision on our side has clearly stood up better than on the other side of the Atlantic.”
Social media is also having an impact on the financial sector with one tweet able to cause a bank run to create liquidity problems, Knot said.
SVB’s demise was precipitated by social media reports that an influential investor was recommending clients to withdraw funds, sending customers scrambling to redeem deposits.
It was therefore time to reconsider the calibration of the liquidity coverage ratio, a buffer of cash and other liquid instruments banks are required to hold to cope with short term funding squeezes, Knot said, echoing comments from other regulators.
Unrealised losses may also need to be better reflected in bank capital buffers, he added.
Knot also cautioned markets against pricing in interest rate cuts next year.
“If they have to adjust that expectation, which in my view is not unlikely, this could of course lead to renewed corrections on financial markets,” he said.