Global regulator calls for ‘urgent action’ on clearing houses and insurers

The world’s most powerful group of global financial policymakers has called for “urgent work” to address gaping holes in regimes to deal with failing clearing houses and insurers whose operations stretch across borders.

The Financial Stability Board, comprising central bank governors and regulators from 24 major economies, issued their call to action days after the global convening body for central banks warned that risks in shadow banks could force more bailouts and fuel runaway inflation.

After a decade of low interest rates, global markets have been jolted this year by soaring consumer prices. Central banks are curbing asset purchases and aggressively raising rates, and authorities fear violent moves could be amplified in the non-bank financial sector, which has taken a greater share of market activity since the 2008 financial crisis.

Already this year the nickel market in London was forced to temporarily close and European energy companies bailed out, underscoring how sudden price moves in one asset can provoke a vicious loop of margin calls and forced sales elsewhere.

“As the 15-year anniversary of the global financial crisis is on the horizon in the coming year, it is critical to maintain momentum and avoid complacency,” the FSB said, noting that while the banking sector risks that triggered the 2008 crisis had been largely dealt with, other risks had not been tackled as comprehensively.

The FSB highlighted the work on clearing houses and insurers as the two most urgent areas in need of attention, although the scope of the work excluded other parts of the ballooning shadow banking sector such as funds and crypto, where policymakers have also noted the need for action.

The global body said there had been insufficient progress on the development of living wills — pre-made plans to wind down important financial entities — for clearing houses, which insulate the market from contagion if there is a default.

Last month, the London Metal Exchange said it was forced into closing the nickel market in March to prevent surging nickel prices from blowing a hole in a stability fund that provides a layer of market protection, an event that could have cascaded across the financial system.

“The FSB has been considering the costs and benefits of potential alternative financial resources and tools for [clearing house] resolution, alongside a comparison to existing resources,” the FSB said on Thursday. “Several potential alternative financial resources and tools have been identified for further analysis, with a plan to consult on policy options in 2023.”

Though authorities in some jurisdictions have reported progress in planning how to wind down systemically important insurers, there is “still work to be done” to make these plans fully operational, the FSB said. It did flag the EU’s proposed resolution plan, unveiled last year, and changes expected in Australia, South Africa and Switzerland, but generally described “mixed progress”.

Aspects of these plans have proved controversial: consumer groups have raised concerns that Brussels’ proposals for how to deal with failing insurance firms could expose policyholders to losses.

The FSB said It would focus its work next year on identifying those “critical functions [at insurers] that need to be maintained in resolution and on exploring resolvability issues related to group and conglomerate structures”. Understanding “interconnectedness” within insurance groups was critical to an effective resolution plan, it said.