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The BIS, a forum for the world's central banks,
said in a quarterly review article that banks' cross-border
claims on so-called non-banks - like insurers, clearing houses,
money market funds and hedge funds - rocketed by 63% to $7.5
trillion between the first quarter of 2015 and the end of March
this year.
The increase in links with non-banks was concentrated at lenders
in the United States, Britain, the Cayman Islands, and Japan.
"The market turmoil unleashed by the COVID-19 shock brought to
the fore vulnerabilities associated with these links," the BIS
said.
It led to margins or cash requirements to back trades at
clearing houses worsening swings in prices and draining banks of
money at an inopportune time, the BIS said.
It also showed that money market funds, used by banks and
companies for day-to-day cash management, can be "fickle"
funding providers, it added.
The sheer size of non-banks and their links to lenders warrants
continued monitoring by the authorities, the BIS said.
"The fact that some non-bank financial institutions face a
substantially different regulatory environment compared with
banks – as well as no or limited formal access to central bank
liquidity or public sector credit guarantees – only heightens
this need," it added.
Central banks have said that money market funds, meant to be low
risk places to hold cash, would have had to suspend themselves
without central banks like the Federal Reserve providing
emergency liquidity.
The article bolsters the case made by central banks that
regulatory reforms may be needed to ensure that non-banks hold
enough liquidity to cope better in market shocks and avoid
undermining the wider financial system but stops short of
specifying any measures.
Securities regulators, which directly supervise funds, have been
more cautious about jumping to reforms, with broad consensus
needed for a global sector.
Claudio Borio, the head of BIS Monetary and Economic Department,
said it was clear there can be tension between regulators over
market finance, but the question of whether additional rules
were needed and possible will be looked at very closely.
"There is scope to adopt a more systemic approach to regulation
of this sector which looks in particular at the impact these
institutions can have on the financial system as a whole," Borio
told reporters.
(Reporting by Huw Jones; Editing by Mark Potter and Steve
Orlofsky)
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