These events have been further reminders of one simple fact: there remain key vulnerabilities within NBFI. The basic regulatory structure is not strong enough. In recent years, the FSB and the international standard-setting bodies have been working hard to address these NBFI vulnerabilities.
....The way architects look at the foundation and resilience of their buildings resembles the way the Financial Stability Board (FSB) looks at the financial system. A structure, after all, is only as strong as its weakest point.
15 years ago, the global financial system was on the verge of collapse. There were, in fact, many weak points. But, we know that non-banks, including investment funds, played a role in that global financial crisis.[1]
More recently, there was the March 2020 turmoil,[2] and indeed other incidents, such as the failure of Archegos and the LDI turmoil.
These events have been further reminders of one simple fact: there remain key vulnerabilities within NBFI. The basic regulatory structure is not strong enough.
In recent years, the FSB and the international standard-setting bodies have been working hard to address these NBFI vulnerabilities. We have made progress, but there is still more to do.
Just like this fantastic building, we are aiming to construct something that can stand the test of time. Something that functions well through hot spells and big storms.
For a resilient structure we need a solid regulatory foundation. Then, macroprudential measures could be added to the design to further support the structure, where needed. Measures that may change over time and could differ from one jurisdiction to the next. Measures that are complements to, but not substitutes for, the baseline set of regulations.
Therefore, to me, a successful macroprudential approach depends on the completion and proper implementation of the international regulations the FSB has been developing.
In the remainder of this speech, I will discuss in more detail the FSB’s recent work in the area of investment funds and NBFI more broadly. I will then offer some thoughts on the next steps at the international level towards a macroprudential approach....
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