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Closer ties between banks and other financial players

Published on September 30, 2020 - 2 mins reading time
Bank watch
The stronger capital base and liquidity rules imposed on banks over the past 10 years have enabled them to better withstand the health crisis. At the same time, the banking sector has seen its links with other financial players strengthen, notably with insurers, pension funds and hedge funds.

Effective measures to absorb the current shock

The Basel III reform, one of the initiatives taken in the wake of the 2007 crisis to strengthen the financial system, has enabled banks to limit the damage caused by the Covid-19 crisis.

Among the most important plans set out in these Accords is the introduction of a liquidity ratio for international banks and the redefinition of regulatory capital. Basel III introduces two liquidity ratios: the LCR (Liquidity Coverage Ratio), designed to enable banks to withstand acute liquidity crises over a period of 1 month, and the NSFR (Net Stable Funding Ratio), a long-term structural liquidity ratio. In addition, the reform strengthens capital requirements, requiring banks to reduce their balance sheet total or increase their capital. This level of capital guarantees banks' solvency in the face of any losses they may incur.

Increase in cross-border lending to non-banks

The coronavirus crisis prompted the banking sector to strengthen its ties with non-banks, and thus stimulated the growth of the "Shadow Banking" or shadow finance market. While the growth of shadow finance had slowed sharply in 2018, accounting for almost $50.9 trillion, the trend reversed in 2020. According to the Bank for International Settlements (BIS), banks' international claims on non-bank financial institutions stood at $7.5 trillion in Q1, up 63% on Q1 2015.

In an article published in the latest BIS Quarterly Review, the authors point out that it was at the height of the financial storm, in the 1st quarter of 2020, that links between banks and non-banks strengthened. Cross-border claims reached $800 billion. This expansion mainly concerns funds located in the USA, the UK and the Cayman Islands.

The links between banks and other financial players are now being closely monitored by the authorities, who are struggling to map out what comes under the heading of shadow banking. The task is not an easy one, as the necessary data is so complicated to retrieve and compare.