Bank for International Settlements General Manager Jaime Caruana said Monday that policymakers need to be alert to bank funding mismatches and to plugging holes that the credit crisis exposed in banks’ ability to identify and tackle systemic risks more broadly.
Speaking at a conference at the European Central Bank in Frankfurt, Caruana stressed that retreating to national banking models is not the answer to the problems highlighted by the financial crisis. Rather, creating a better global framework for managing systemic risks is the order of the day, he said, adding that financial integration’s “enormous” benefits should not be underestimated.
“Financial integration means that we live in a world where the balance sheets of financial firms span the globe, and we need to monitor that,” Caruana said, adding that regardless of what form this regulation takes, the first step should be to collect more information on banks’ liabilities.
The crisis has revealed “blind spots” in policymakers’ understanding of how markets work and the way in which they interact with the real economy, he said.
The systemwide maturity mismatch seen during the crisis was managed by central banks with swaps agreements and so on, he noted, but “this is an area where we reveal also holes in the technology for monitoring these systemic risks.”
Caruana cited a recent report by the BIS Committee on the Global Financial System that found the buildup of maturity mismatches on the balance sheets of internationally active banks was a major systemic vulnerability requiring better monitoring and management.
“It is key to recognize that the principal threat to financial stability was not the cross-border activity itself,” he said; “rather, it was the inadequate recognition and management of the risks related to that activity.”
Global cross-border lending has contracted by about 15% from a peak of $36 trillion in early 2008, he noted.