Crypto and pension fund crises are major concerns for the world’s top financial watchdog, as it expresses fears for the stability of the financial system.
In a letter to G20 leaders ahead of their meeting in Bali next week, Financial Stability Board chairman Klaas Knot said “current conditions are unprecedented in a number of ways and we need to be mindful of existing and potential new financial vulnerabilities.”
Macro factors have exposed structural problems within the financial sector in areas such as crypto, which has had a prolonged downturn.
The asset class is top of mind for the FSB as crypto is hit by yet another crisis, with Sam Bankman-Fried’s FTX exchange on the brink of collapse.
“The turmoil in the crypto market underscores the need for activities and markets for crypto assets to be subject to effective regulation and oversight commensurate with the risks they pose, both at the national and international levels,” Knot said.
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The international standards body recommended last month that if crypto performs an activity equivalent to one in traditional finance, it should be regulated in the same way.
Knot also warned of risks from financial institutions that are not banks, including insurance companies, hedge funds and pension funds. Although not licensed as banks, these businesses conduct activities similar to banks, which are subject to stricter regulations such as higher capital requirements.
Referring to the Bank of England’s intervention to save UK pension funds from collapse, Knot said “some parts are opaque and subject to vulnerabilities that can be triggered in periods of market stress.”
The near-collapse of UK pension funds last month was caused by “hidden leverage”, a mismatch between redemptions and the ease with which a fund can be liquidated. Knot said the FSB will look at reusing existing so-called non-bank financial intermediary policies to address systemic risk, or developing new ones if existing ones prove inadequate.
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“We will also take steps to address liquidity mismatches in mutual funds and ensure better preparedness for market participants for sudden spikes in demand for liquidity,” Knot said.
He added that as global cooperation helped spur reform after the financial crisis, it must do so again now.
“At this critical time, I call for the G20’s continued and enhanced support for the work of the FSB, to strengthen the resilience of the financial system as a whole,” he wrote. “The aim is not only to address key vulnerabilities, but to ensure that finance can support our economies in harnessing the benefits of digitization and climate change while managing the associated risks.”
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