The dangers lurking for non-bank institutions

SGGP 06/04/2023 09:06

The recent banking turmoil in the US and Europe could spill over into crucial non-bank institutions such as pension funds, further complicating central banks' fight against high inflation. This assessment was recently released by the International Monetary Fund (IMF) as a decade of comfortable low interest rates comes to an end.

Recent tensions at several banks in the US and Europe serve as a stark reminder of the growing financial vulnerabilities that have been building up over years of low interest rates, pent-up volatility, and abundant liquidity. It is particularly important to understand and protect the broader financial sector, which encompasses a wide range of non-bank institutions.

The French took to the streets to protest pension reform laws, a way to maintain the pension fund.

In a social media post by three IMF officials – Fabio Natalucci, Antonio Garcia Pascual, and Thomas Piontek – accompanying a chapter in the IMF's semi-annual report on global finances, the experts argued that weaknesses had emerged after more than a decade of low interest rates and readily available cheap money.

According to experts, central banks on both sides of the Atlantic have been on the right track in trying to address high inflation by raising interest rates without further exacerbating the banking turmoil caused by the devastating collapse of Silicon Valley Bank (SVB). Meanwhile, non-bank financial intermediaries (NBFIs) such as pension funds, insurance companies, hedge funds, and investment funds have grown significantly since the 2008 global financial crisis.

These institutions currently account for nearly 50% of global financial assets, as regulators move to tighten regulations on banks. However, due to their close ties to traditional banks, NBFIs can become a channel for exacerbating financial stress. The report states that stress tends to arise when NBFIs borrow money to finance investments or increase profits through the use of financial instruments such as derivatives, and when an institution fails to generate enough cash through asset sales to meet investors' buyback requirements.

The bailouts of SVB and Credit Suisse may not be isolated incidents, and moreover, the problems could potentially spill over from the traditional banking sector into the non-banking sector, which currently holds nearly half of total global financial assets. Last year's collapse of the UK pension funds almost certainly highlighted the risk of higher global interest rates triggering more financial crises.

The Bank of England has intervened to support pension funds by pledging to buy up to £65 billion of government bonds, but the IMF says such moves are not ideal at a time when central banks are trying to ease the pressure of rising living costs. The Guardian, citing a report by IMF experts, noted that with inflation at its fastest pace in decades, central bank liquidity injections aimed at stabilizing finances could further complicate the fight against inflation.

The smooth functioning of the non-banking sector is crucial for financial stability. To address this issue effectively, IMF experts suggest that policymakers must utilize a range of tools, including implementing stricter supervision and regulation of the sector, and requiring companies to share more data on the risks they face…

Source: https://www.sggp.org.vn/nguy-co-rinh-rap-cac-the-che-phi-ngan-hang-post684739.html