By Huw Jones
LONDON – Regulators will discuss next month how to ease pressure on global banks to hold unnecessarily large levels of capital in every country they operate, the Financial Stability Board said on Wednesday.
Banks complain of having to “ring fence” large amounts of capital and liquidity at every foreign branch because local regulators don’t trust the lender’s home authority in a crisis to free up capital being held at group level.
The distrust, a feature of the global financial crisis a decade ago, fragments capital markets and bumps up costs for banks and users.
Drawing on preliminary lessons from the COVID-19 pandemic, the FSB said its meeting on Nov. 30 will discuss “actions” that could be taken to “prevent detrimental ring-fencing and fragmentation” of capital and liquidity.
It will also “facilitate cross-border cooperation and communication, and other actions to promote confidence in times of crisis”.
These could include a greater use of “memorandums of understanding” between regulators.
The FSB coordinates financial rules for the Group of 20 economies (G20), whose finance ministers meet this week.
The watchdog is also looking at how regulators from different countries could “defer” to each other where they have similarly robust rules to avoid costly duplication in compliance for financial firms.
FSB Chair Randal Quarles told G20 ministers in a letter that there has been a strong market recovery in recent months, but the path of recovery for the real economy remains uncertain, with potential implications for the financial system.
“Financial stability conditions therefore remain very challenging,” said Quarles, who is also Vice Chair of the U.S. Federal Reserve.
The FSB is developing a global “roadmap” to raise awareness of the steps banks and companies should take between now and the end of 2021 to end their use of the Libor interest rate benchmark, Quarles said. Libor is being scrapped after banks were fined for trying to manipulate it.
Reporting by Huw Jones; editing by Emelia Sithole-Matarise