MNI INTERVIEW: Coordination Needed On Non-Banks-Irish Deputy

Strong global coordination among policymakers and regulators is needed to implement measures to address systemic risks from non-banks after regulators moved to toughen liquidity guidelines, Central Bank of Ireland Deputy Governor Vasileios Madouros told MNI.

Speaking to MNI on the sidelines of the International Monetary Fund and World Bank spring meetings in Washington this week, Madouros said certain types of funds and their risk strategies had amplified recent financial shocks.

"Our focus increasingly has been to think about the sector from a financial stability perspective and how can we make sure that it is resilient to adverse shocks,” he said, pointing to the UK’s gilt-market sell off involving Liability-Driven Investment funds in September 2022.

"International cooperation is absolutely key. We're talking about global capital markets here," he said. (See MNI INTERVIEW: IMF's Adrian Warns Of Inflation Risk To Markets)

TAILORED AND TARGETED

"It was the vulnerabilities in the LDI strategies and in the LDI segment because of higher levels of leverage that led to the amplification effects that we saw. The measures that we're taking is to guard against very high levels of leverage and ensure that this segment of the financial system is able to absorb big increases in interest rates if that were to happen again.”

The G20's Financial Stability Board and IOSCO, a global grouping of securities markets regulators, have issued tougher liquidity management guidance and the FSB recently said non-banks should hold sufficient cash and draw up contingency plans for coping with spikes in collateral.

Still, the Central Bank of Ireland deputy governor said focus now needs to shift to implementation, and that it is important to keep reforms tailored and targeted because of the diversity of the sector. "A one-size-fits-all approach is not going to work."

Globally, the nonbank sector has grown rapidly over the past decade, and Ireland has one of the largest funds industries in the world with around EUR4.5 trillion in assets under management.

"The international dimension is really critical," Madouros said. "Because these are global capital markets and you need an internationally coordinated approach." He noted that Ireland introduced measures about 18 months ago to guard against excessive levels of leverage and liquidity mismatches in property funds domestically.

Data collection over the last few years has gradually increased and it has been critical to better understand potential vulnerabilities and potential interconnectedness, he said. "Being able to share data information jointly and to get a better picture of developments in capital markets and entities that are active in capital markets is one really important dimension.

"Secondly, is how can we make progress on more information sharing, data sharing across jurisdictions," he said. It's less about specific markets but about how can we all of us jointly can put together the different pieces of the puzzle so we have a better picture of flows of finance globally."

UNDERLYING VULNERABILITIES

"The work that is happening at the moment is thinking about potential vulnerabilities from leverage in different parts of the financial system," he said, noting the work may be "harder" not least because of the challenges of measuring leverage consistently across activities.

Asked about the state of risks to the NBFI sector from higher interest rates, Madouros said: "The way we think about it is not so much about what is the interest rate path or something like that, but what are the potential underlying vulnerabilities that could amplify any market moves that we might see?"

The deputy governor noted that he has seen significant adjustment in commercial real estate valuations in Ireland and internationally, but "we haven't seen the financial sector amplifying what is happening." (See MNI INTERVIEW2: China Property Crisis To Drag On -IMF's Adrian)