Carney Warns of Balkanization Risk in Global Financial Mark

Mark Carney, head of the Financial Stability Board, warned against giving in to “reform fatigue” a decade after the financial crisis, and called on the Group of 20 nations to strengthen regulatory cooperation.

Leaving crucial standards incomplete “could erode our willingness to rely on each other’s systems and institutions and, in the process, fragment pools of funding and liquidity, create inefficiencies and frictions, reduce competition and diminish cross-border capital flows,” Carney wrote in a letter to the G-20.

“The net result will be less and more expensive financing for households and businesses, and very likely lower growth and higher risks in our economies,” Carney, who also heads the Bank of England, wrote in the letter published on Friday.

G-20 finance ministers and central bank governors convene today in the German spa town of Baden-Baden for talks highlighted by the participation of U.S. Treasury Secretary Steven Mnuchin on his first official trip abroad. The meeting offers a first chance to gauge the U.S. response to Germany’s renewed push this week for a deal in the Basel Committee on Banking Supervision on completing the post-crisis capital framework known as Basel III.

The European Union has urged President Donald Trump not to walk away from global financial rules. The U.S. leader has vowed to roll back financial regulation, and since taking office he has begun to pull the U.S. out of some international agreements.

Talks in the Basel Committee bogged down late last year, when Germany and other EU countries dug in their heels to oppose a proposed output floor -- a blunt check on firms’ use of their own statistical models to measure asset risk that would drive up their capital requirements. The U.S. has long been skeptical of internal models, while Europe and Japan insist they provide more accurate assessments in many cases.

“Our collective agreement on the remaining elements of Basel III is essential,” Carney wrote. “Completing this standard will protect the gains in global resilience, restore full confidence to the bank capital framework, give certainty to international banks, and help avoid measures that could balkanize international banking.”

The FSB will complete its guidance on so-called internal total loss-absorbing capacity by the G-20’s Hamburg summit in July, Carney wrote. The measure is intended to provide “home and host authorities with confidence regarding the resolution of cross-border banks,” and to minimize “incentives to ring-fence assets domestically which would fragment the financial system,”
he wrote.

Carney said that by the summit the FSB would also deliver an assessment of shadow banking and related financial-stability risks, report on reforms to over-the-counter derivatives markets, publish final guidance on the resolution of clearinghouses and report on misconduct risks.
“A decade on from the start of the crisis, the G-20 has made substantial progress in building a financial system that is more resilient and better able to fund households and business in sustainable way,” Carney wrote. “As the global recovery gains strength, now is not the time to risk these hard-won gains.”

Bloomberg

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