Page 30 - Banking Finance May 2023

ARTICLE

The global banking sector survived the pandemic shock well, frameworks. The following are major recent regulatory
gaining strength from capital buffers built since the Global efforts made both internationally and in India to strengthen
Financial Crisis (GFC) and supported by various regulatory the stability and efficiency of the financial system.
concessions to mitigate the impact of the pandemic. In the
fast-changing global macroeconomic environment, fraught 1. Recent Global Regulatory Develop-
with geopolitical and pandemic-related concerns, however,
ments and Assessments
the banking sector faces new challenges emanating from
Liquidity imbalances in bond market: In the light of
rising interest rates and the likely increase in debt servicing
burdens. Credit demand-which is largely procyclical- is likely dislocations in sovereign debt markets, the FSB(Financial
to remain subdued in response to the weakening economic Stability Board) examined the liquidity, structure, and
outlook, with depressed treasury income, the likelihood of resilience of core government bond markets and observed
increasing delinquencies and dents to profitability. that changes in market structure have rendered these
markets susceptible to liquidity
imbalances during periods of stress.
According to the FSB, dealers' risk
warehousing capacity to support
intermediation is lower than the
magnitude of trade flows, especially
during times of stress, and non-bank
liquidity sources do not seem to
enhance market making. Elevated
debt levels and increased usage of
government bonds by some investors
for trading, hedging and liquidity
(Source: Bank Lending Survey Q2: 2022-23, RBI) management strategies may have made some investors
more susceptible to shocks. Central bank interventions,
Global regulatory priorities have shifted back to though effective in alleviating market strains, come with a
consolidation of the regulatory framework and protecting price and should not replace market participants'
the financial system from the knock-on effects of an responsibilities towards managing their own risks. To
uncertain, volatile and hostile macroeconomic environment. improve market resilience, the FSB also suggests policy
Integrating climate risk into existing frameworks and measures such as enhanced use of central clearing for cash
mitigating the rising cyber risks are major areas of focus. and repo transactions and use of all-to-all (A2A) trading
Domestically, the emphasis is on improving the resilience of platforms to lessen the need for dealer intermediation.
financial intermediaries, enhancing customer and investor
protection, accelerating digitalisation, developing financial Review of Margining Practices: Heightened market
markets and strengthening the supervisory architecture. volatility experienced in March 2020 led to a spike in margin
The Financial Stability and Development Council (FSDC) and calls across the financial system, for both centrally and non-
its Sub-Committee remain steadfast in their commitment to centrally cleared markets. There was significant dispersion
develop a robust and efficient financial system for the Indian in the size of increases in initial margins (IMs) across and
economy. within asset classes. Evidence suggests that transparency
around IM models differs across CCPs(Centrally Cleared
As the global economy transitions through a period of Markets) and jurisdictions. In this context, the BIS and the
multiple shocks, regulatory efforts are refocusing on building International Organisation of Securities Commissions (IOSCO)
up the resilience of the financial system. Specifically, global reviewed margining practices. and suggested areas for
regulatory initiatives aim to address fragilities in non-bank further policy work such as increasing transparency in
financial intermediation and certain segments of financial centrally cleared markets through consistent metrics and
markets, leveraged lending, cyber risks and crypto assets. disclosures concerning procyclicality. They also recommend
Efforts are also on to integrate climate risk into regulatory improving disclosures about liquidity, identifying data gaps

28 | 2023 | MAY | BANKING FINANCE