Klaas Knot: A global Europe to meet global financial stability
challenges
Speech by Mr Klaas Knot, President of the Netherlands Bank, at the EUROFI High Level Seminar
2022, Paris, 25 February 2022.
* * *
Thank you Didier, it is great to be back. As you indicated in your kind introduction, this time I am
speaking here in my capacity as Chair of the Financial Stability Board, although with a nod to my
other hat, as President of De Nederlandsche Bank. But whether you stand on top of the BIS
tower in Basel - where the FSB is housed -, the Eurotower in Frankfurt, or the Toorop building in
Amsterdam, the view is not fundamentally different. In fact, many financial stability risks we face
today are not only common across Europe, but are global in nature. And these global issues
require global cooperation, which is why they are at the top of the FSB's agenda.
Today I want to talk about these global issues, what the FSB is doing, and how Europe can play
its part. I will be discussing these issues against the backdrop triggered by the Russian invasion
of Ukraine. Developments keep evolving as I am speaking, and I do not want to engage in any
speculation about what might happen. But we need to be alert that the dramatic shift in the
geopolitical landscape may also affect the functioning and resilience of the global financial
system.
One of the first priorities for policy makers worldwide is to navigate their economies out of the
Covid pandemic. The economic fall-out of the pandemic seems to be subsiding, and the
extraordinary fiscal and monetary support measures that kept economies afloat are being
gradually unwound. But, as the economic recovery is proceeding at an uneven pace across
regions, this unwinding process is increasingly likely to be asynchronous. This creates the
potential for cross-border spillovers. Moreover, since the onset of the pandemic, both public and
private sector debt have increased, while asset valuations have grown amid a continued search
for yield. This has made the global financial system more vulnerable to a disorderly tightening of
financial conditions. A concern that has been accentuated lately by the return of high inflation.
The job of the FSB here is to monitor and analyze developments closely and facilitate global
coordination of policies, where necessary, to minimize the risk of a disorderly exit.
At the same time as we need to chart a course out of the pandemic, we need to strengthen
resilience in the non-bank financial intermediation, or NBFI, sector. A sector that now represents
almost half of global financial assets and is evolving rapidly. Enhancing NBFI resilience offers
significant benefits, not least during the transition to a post-Covid world. First and foremost, it will
contribute to a more stable provision of financing to the economy. Second, it will enhance the
ability of the financial system to absorb different types of shocks. And a resilient NBFI sector
reduces the need for the types of extraordinary central bank interventions we witnessed in March
2020. The FSB is therefore working on vulnerabilities in specific NBFI areas. This includes
money market funds, where we have developed policy proposals to enhance their resilience. And
it includes open-ended funds, where we are working with IOSCO to assess whether
recommendations to address structural vulnerabilities are effective. We will use the insights to
develop a systemic approach to NBFI risks and policies to address them.
We also need to remain vigilant to new threats to the financial system, particularly those that will
have a transformational impact on our economies such as digitalization and climate change.
Digital innovation offers opportunities for more efficient and inclusive finance, for example in
global payments, but it also creates potential new risks. In particular, markets for crypto-assets
are fast evolving and could reach a point where they represent a threat to global financial stability.
It is critical that we address risks in crypto-asset markets holistically and avoid fragmented policy
approaches that could give rise to regulatory gaps and arbitrage. The FSB is stepping up to the
plate to deliver effective and risk-based regulatory approaches for all types of crypto-assets. We
are doing so in close cooperation with standard setting bodies and national authorities. These
approaches include reviewing the High-level Recommendation for the regulation, supervision and
oversight of stablecoins, undertaking further work on so-called unbacked crypto assets, and
analyzing the financial stability implications of the rapidly evolving decentralized finance.
Another feature of digital innovation is the ever-greater use by financial institutions of outsourcing
to third-party service providers. While this may have provided additional resilience during the
pandemic, it has also reinforced the importance of effective policies for the oversight of financial
institutions' reliance on critical service providers. To this can be added the greater exposure to
cyber risk. Greater interconnections in the financial system increase the surface for cyber
attacks, which have escalated during the Covid pandemic. Enhancing operational and cyber
resilience will therefore remain an important item on the FSB agenda.
Next to digitalization, we face the ever-present challenge to address risks to financial stability
from climate change. These risks reflect the particular nature of climate change: it is global in its
causes and its implications, and it is pervasive, affecting all kinds of financial assets and
contracts. If we want to safeguard financial stability and ensure the financing needed for the
transition to net zero, it is key that climate related financial risks are adequately priced in financial
contracts. This is crucial because financial contracts price the future, and that future is about to
undergo fundamental change. The FSB's roadmap for addressing climate-related financial risks
aims to ensure that climate risks are properly reflected in all financial decisions. It covers
disclosures, data, vulnerability analysis, and regulatory and supervisory approaches. Because
there are no international standards in place yet, not least relating to disclosures, we have an
enormous opportunity to get this right from the start. We should not miss it.
It is important to act early to address these big transformational issues in the global financial
system. Experience has taught us that global financial stability risks, like so many other global
issues, are often best dealt with using a globally consistent approach. Not because one size fits
all, but because this makes national policies more effective, provided that the global approach
leaves room to be tailored to country-specific circumstances when it comes to implementation.
Because of their history, to us Europeans, this is second nature. From the Treaty of Rome to the
Treaty of Maastricht, now 30 years ago, the process of European integration has always been
about Europeans working together to pursue common interests. That's why we have always
been a strong partner in fostering international cooperation and high-quality minimum standards.
Indeed, European countries have been key contributors to the international financial architecture.
From the Bretton Woods Agreement back in 1944 to the establishment of the Financial Stability
Board in 2009.
When it comes to financial stability, the EU itself, but also other countries in Europe, has
benefitted greatly from its commitment to multilateralism. The centre pieces of the European
financial regulatory framework as we know it today are based on the G20 reform agenda that
followed the financial crisis of 2008. These reforms have served the European financial systems
well during the Covid pandemic. Greater resilience of major banks at the core of the financial
system has allowed the system to absorb, rather than amplify, the economic shock. And in turn,
this helped European economies weather the storm.
As we have seen, today Europe and the world need each other more than ever in keeping the
financial system stable and safe. Focusing on the EU, how can it contribute to making this global
agenda a success?
First of all, the EU can play an active role in implementing the lessons learnt from the recent
crisis. The immediate challenge is to facilitate an orderly exit from the different support measures
without creating shock effects or scarring the economy. Also, any exit strategy will have to bear
in mind the risk of spillovers to other countries from uncoordinated actions.
Next, the EU should aim to lead by example by implementing reforms in a comprehensive and
consistent manner. In particular, the EU could make further progress in implementing the Basel
III standards in accordance with the internationally agreed framework.
In addition, policy makers need to strengthen the regulation of non-bank financial intermediation.
For an internationally consistent approach, it is important that the FSB's recommendations on
money market fund reforms are taken on board in the upcoming review of the EU's Money Market
Funds Regulation.
Moreover, the Covid pandemic has once again highlighted the unfinished agenda of increasing
the growth potential across Europe, completing the European banking union and the need to
break the interconnectedness between governments, the domestic banking sector and
nonfinancial corporates. Additional measures are needed to develop the European Capital Markets
Union and facilitate private risk-sharing.
Finally, the EU can play a leading role in supporting the transformation of the financial system.
With the Sustainable Finance Strategy, Europe is leading the way, for example with the
development of a green taxonomy and incorporating climate risks into prudential regulation and
stress testing.
When it comes to meeting the challenges of rapid digitalization, the EU is making important
progress on regulating crypto-asset markets, and creating financial oversight of critical third-party
service providers. Europe's hands-on experiences with these initiatives can provide valuable
input for the global discussions.
The financial system has proven more resilient in light of the pandemic. This has illustrated the
benefits of our collective, global reform efforts. The FSB has set out an ambitious work program
to deal with the structural challenges of this age. The EU is already taking these challenges head
on. This makes me optimistic. We are working towards the same objective. In the road towards
that objective, we should make sure that everyone is on board. This means we need European
policies that fix European problems and can serve as an example for others, but that are also
compatible with a coordinated global response.
This is not only good for the world, it is also good for Europe. Because European ambitions can
only succeed if they are part of a larger, global effort.
Perhaps no one understood this better than Jean Monnet, a great Frenchman and a great
European of the 20th century.
Of course we all know Jean Monnet as one of the founding fathers of what would become the
European Union. But what is less known is that he was also quite a global guy. Even at a young
age, he had traveled the world to explore new markets for his family's cognac business. During
the First World War, he worked closely with the Americans to coordinate the food supply of the
allied troops in France. During the Second World War, he served in Washington as a liaison
between the British and American governments on economic support to the UK. He was one of
the architects of the land-lease act and of President Roosevelt's famous 'Arsenal-for-democracy'
speech. Right after the war, he realized that any plans for European cooperation would only work
if they were compatible with American ideas, thus securing the much-needed Marshall aid.
So Monnet's later vision of Europe was very much based on what he had learned on the world
stage during the decades before.
That same spirit of Jean Monnet is needed today. The spirit of a global Europe. The spirit that
brought forth not only the Treaty of Rome, and the Treaty of Maastricht, but also the Bretton
Woods Agreement, and the post-crisis G20 reforms. Just as we Europeans chose to cooperate
to pursue common interests, we need to cooperate at the global level too, to keep our financial
systems safe and sound and fit for purpose in the 21st century.