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Turmoil in Banking Sector Calls for Review of Liquidity Rules

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BNN Correspondents
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Klaas Knot calls for a review of rules and regulations in the banking sector.Image Credit: REUTERS

Turmoil in Banking Sector Calls for Review of Liquidity Rules

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The recent turmoil in the banking sector has prompted Klaas Knot, chair of the G20's Financial Stability Board, to emphasize the need for a thorough review of liquidity rules and the application of regulations. Knot believes that the rules governing banks and the calculation of their liquidity buffers should be reassessed in light of the events that unfolded after the collapse of Silicon Valley (SVB) bank in the United States and the subsequent forced takeover of Credit Suisse by UBS in Switzerland.

The collapse of SVB bank in March resulted in a plunge in European banking stocks and exposed vulnerabilities within the system. U.S. regulators had deemed SVB as not posing a "systemic" risk and therefore exempt from complying with more stringent liquidity rules. On the other hand, Swiss regulators decided against utilizing resolution tools introduced after the 2008 global financial crisis for banks considered "too big to fail." These events have prompted the Financial Stability Board to evaluate the responses of U.S. and Swiss authorities.

Reevaluating Systemically Important Banks and Global Capital Standards

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Knot also suggests that regulators should reconsider the categorization of systemically important banks and their inclusion under global capital standards, specifically the Basel III Accord. He believes that the current criteria used to determine which banks are deemed systemically important may need to be reevaluated to ensure global financial stability. Knot emphasizes that this issue is not limited to Europe alone but is relevant in other parts of the world as well. He further asserts that the supervision on the European side has fared better than that on the other side of the Atlantic.

Furthermore, Knot highlights the impact of social media on the financial sector, stating that a single tweet can trigger a bank run and create liquidity problems. The demise of SVB was accelerated by social media reports, which prompted customers to withdraw funds after an influential investor recommended doing so. Knot suggests that it is crucial to reconsider the calibration of the liquidity coverage ratio, a buffer required to handle short-term funding squeezes, in light of these developments. He also advocates for a better reflection of unrealized losses in bank capital buffers.

In conclusion, Knot cautions against prematurely pricing in interest rate cuts for the following year. He believes that if market expectations need adjustment, it could lead to renewed corrections in financial markets.

BankingSector FinancialStability liquidityrules
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