22 October 2024

FSB's Knott: Strengthening Financial Resilience: Lessons from Pittsburgh

And it’s not only in 2020 that unprecedented policy actions were needed. In 2023 the fire brigade had to turn out again. So, we’ve made progress, but there is much left to do if we want a truly resilient financial system.

It could have been right here in New York City. That would have been fitting, as this city was, and still is, the center of gravity for global finance.

But, as it happened, the US administration made a last-minute decision to pick Pittsburgh as the venue for the G20 summit.

We are back in the fall of 2009. Less than a year earlier, when G20 leaders first met in Washington DC, the world economy had been facing its greatest crisis in generations. At the Pittsburgh Summit, the memory of the crisis was still fresh.

The fall of Lehman. The rescue of AIG. The race against the clock to prevent a total meltdown of the financial system.

Leaders from the 20 largest nations in the world had all gone through those fateful crisis days. They shared a conviction that this should not happen again. Ever.

They decided on a massive strengthening of regulation to address the weaknesses in the global financial system and to curb excessive risk taking. And they endorsed the mandate of the newly established Financial Stability Board to coordinate and monitor progress.

Pittsburgh turned the tide. The rest is history. But it is an unfinished history.

For sure, the reforms that were agreed in Pittsburgh did substantially strengthen the global financial system. In recent years, markets have experienced several episodes of turmoil, and we have seen potentially destabilising failures of banks and non-banks. But the core of the system has held up relatively well.

So, one interpretation is that the financial system has proved to be resilient. But that is not entirely true.

Take March 2020 for example. This turmoil was contained both through improved resilience and unprecedented policy actions. Without the combined force of these policy actions, the reforms implemented since 2009 may have not been sufficient to stave off another financial crisis.

And it’s not only in 2020 that unprecedented policy actions were needed. In 2023 the fire brigade had to turn out again.

So, we’ve made progress, but there is much left to do if we want a truly resilient financial system. One that can finance the economy through thick and thin without recourse to extraordinary support. Furthermore, the financial system is evolving, and so must our regulations. Can we keep up the pace? Allow me to share some concerns about that.

First of all, our work to make the banking sector more resilient is not yet complete. For one thing, the final Basel III standards still need to be implemented in many jurisdictions. In the meantime, the banking turmoil in March last year was a reminder that bank runs are not a thing of the past. The demise of Silicon Valley Bank and Credit Suisse not only brought lessons for banks and supervisors. They also highlighted that 13 years after the FSB issued its Key Attributes for Effective Resolution Regimes, authorities still face challenges in dealing with failing banks.

Next to the unfinished agenda in banking, the non-bank financial sector continues to face serious vulnerabilities. Partly as a response to strengthening banking regulation, non-bank financial institutions are playing a larger role in financing the real economy, now accounting for nearly half of total global financial assets....

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