Klaas Knot: Strengthening financial resilience - lessons from
Pittsburgh
Speech by Mr Klaas Knot, Chair of the Financial Stability Board and President of the
Netherlands Bank, at the Bloomberg Global Regulatory Forum, New York City, 22
October 2024.
* * *
Good morning everyone.
It could have been right here in New York City.
That would have been fitting, as this city was, and still is, the center of gravity for global
finance. But, as it happened, the US administration made a last-minute decision to pick
Pittsburgh as the venue for the G20 summit.
We are back in the fall of 2009. Less than a year earlier, when G20 leaders first met in
Washington DC, the world economy had been facing its greatest crisis in generations.
At the Pittsburgh Summit, the memory of the crisis was still fresh. The fall of Lehman.
The rescue of AIG. The race against the clock to prevent a total meltdown of the
financial system. Leaders from the 20 largest nations in the world had all gone through
those fateful crisis days. They shared a conviction that this should not happen again.
Ever. They decided on a massive strengthening of regulation to address the
weaknesses in the global financial system and to curb excessive risk taking. And they
endorsed the mandate of the newly established Financial Stability Board to coordinate
and monitor progress. Pittsburgh turned the tide.
The rest is history. But it is an unfinished history. For sure, the reforms that were agreed
in Pittsburgh did substantially strengthen the global financial system.
In recent years, markets have experienced several episodes of turmoil, and we have
seen potentially destabilising failures of banks and non-banks. But the core of the
system has held up relatively well. So, one interpretation is that the financial system has
proved to be resilient. But that is not entirely true. Take March 2020 for example. This
turmoil was contained both through improved resilience and unprecedented policy
actions. Without the combined force of these policy actions, the reforms implemented
since 2009 may have not been sufficient to stave off another financial crisis. And it's not
only in 2020 that unprecedented policy actions were needed. In 2023 the fire brigade
had to turn out again.
So, we've made progress, but there is much left to do if we want a truly resilient
financial system. One that can finance the economy through thick and thin without
recourse to extraordinary support. Furthermore, the financial system is evolving, and so
must our regulations. Can we keep up the pace? Allow me to share some concerns
about that.
First of all, our work to make the banking sector more resilient is not yet complete. For
one thing, the final Basel III standards still need to be implemented in many
jurisdictions. In the meantime, the banking turmoil in March last year was a reminder
that bank runs are not a thing of the past. The demise of Silicon Valley Bank and Credit
Suisse not only brought lessons for banks and supervisors.
They also highlighted that 13 years after the FSB issued its Key Attributes for Effective
Resolution Regimes, authorities still face challenges in dealing with failing banks.
Next to the unfinished agenda in banking, the non-bank financial sector continues to
face serious vulnerabilities. Partly as a response to strengthening banking regulation,
non-bank financial institutions are playing a larger role in financing the real economy,
now accounting for nearly half of total global financial assets. And as we have seen
over the past few years, structural vulnerabilities in the sector have the potential to
cause systemic risk. These include liquidity mismatches, leverage, and inadequate
margin preparedness. The FSB, working with other standard setters, has done a great
deal of work on this issue. We have issued policy recommendations in several key
areas. Drawing up these policy recommendations, however, is not enough to stem
systemic risk in NBFI. For that to happen, we must implement them. That means
authorities must not only put them into national laws and regulations, they must also
have the capacity to operationalize them.
Third, technological innovation continues to shape the way the financial sector
functions, and it adds another layer of complexity. Technology can create new
interdependencies, for example when many financial institutions rely on the same
service providers. It can also increase the speed at which a crisis unfolds. And
technology raises important questions about the regulatory perimeter. Above all
technology related risks can exacerbate pre-existing vulnerabilities in the financial
system and may create new ones. Take crypto-assets. This fast-growing market has
seen more than its fair share of bankruptcies, liquidity crises and outright fraud, even as
its links with traditional finance continue to grow. The FSB has issued recommendations
to regulate the market for crypto-assets. The G20 has endorsed these
recommendations and, again, they now need to be implemented globally.
As you might notice, I'm talking a lot about implementation, because that's where my
concern lies. It seems that, 16 years after Lehman, implementation fatigue has started
to set in. Political commitment for maintaining financial stability is usually the highest
when the collective memory of the last crisis is still fresh. When this memory starts to
fade, there is the risk that financial stability is taken for granted. Something that can be
left to the bureaucrats, to the technicians. Not least because there are so many other
policy priorities to deal with for governments. But that would be a mistake. We do need
the involvement of politicians, of lawmakers, because without them, it becomes even
harder to implement necessary regulations. After all, financial stability is the foundation
for almost all public policy. If financial stability is gone, as a government you can forget
about the other policy priorities. You will spend most of your time drawing up rescue
plans for an economy in free fall. So we should not wait for the next crisis.
We also need commitment in good times, when the work to develop and implement
policy needs to get done. This commitment is even more important in a world that is
getting more fragmented, both politically and economically. I am concerned about our
capacity to work together on cross-border challenges in such a world. During the Global
Financial Crisis, policymakers around the globe were able to respond swiftly and
effectively. In a fragmented world, such a swift response could become more
complicated. This could prove costly because the most important challenges to financial
stability are precisely the cross-border issues that we can only solve if we work together.
And to the financial industry I would say: rules that strengthen the resilience of the
financial system are in your best interest too. Some in the industry view regulation as a
constraint, something that limits profitability and imposes undue costs. But it's just the
other way around. Financial regulation is not an obstacle, it is an enabler of sustainable,
long-term growth. Globally implemented regulation strengthens international financial
stability, levels the playing field, and, in turn, enhances the confidence of your
shareholders, clients, and counterparties. Strong regulation is not a constraint on the
financial industry, it is an asset.
15 years after Pittsburgh, strengthening the financial system is an unfinished history.
Partly that comes with the job. The financial system is always evolving, so our policy
also needs to evolve. But, that's not the only reason. It is also important that authorities
finish implementing the measures we've all agreed are needed to address existing
vulnerabilities. Vulnerabilities that could lead to the next crisis, if they are allowed to
persist.
This calls for maintaining our ambition as policy makers, and for law makers to take the
agreed policies all the way through to implementation. I wish for us to have the
determination and collaborative spirit that the leaders in Pittsburgh collectively felt. Let's
work together to finish what we started. Let's stay sharp, focused and committed to
preserving financial stability. And where better to express that commitment than in the
city that never sleeps.