he rising significance of non-banks has increased the speed and scope of stress transmission through the global financial system at a time when the importance of the U.S. dollar has grown, the Bank for International Settlements (BIS) has said.
The umbrella group for the world’s central banks said the structural shifts in favour of these players such as pension funds and insurers has increased market complexity and highlighted the need to gather more data on their activities.
“In order to preserve the benefits from a global funding market based in U.S. dollars we will need to make sure that the intermediation chain is robust,” said Philip Lowe, chairman of a central bank forum for monitoring the broad financial system and the governor of the Reserve Bank of Australia.
“We have made progress with banks after the global financial crisis but we do not have enough transparency on the activity of non-banks.”
Dollar borrowing costs spiked in March to levels last seen during the 2007-2008 financial crisis as a global rush to secure funding ramped up the pressure on global portfolios held by these non-banks.
The dollar has returned to the dominant position it held around the turn of the century, gaining share in international funding and accounting for 61% of official foreign exchange reserves.
And though dollar funding activity has declined in Europe, trading has risen in the rest of the world, especially within emerging markets, the BIS said. Moreover, non-banks have increasingly taken on the mantle that banks once held in intermediating in the vast but opaque dollar funding markets.
But unlike banks, non-banks have lesser access to reliable sources of U.S. dollar funding such as central bank discount windows and therefore should they experience distress, this could trigger fire sales that could amplify any market volatility, the BIS said.
And with global economies increasingly interconnected, shocks in one market could be transmitted with large effects on the global financial system, affecting the cost and availability of U.S. dollar financing.
The BIS said authorities around the world should seek to improve the transparency of global U.S. dollar funding activities through additional data collection, greater data sharing and improved disclosure.
They should also consider improving the collection of data on the involvement of non-banks’ institutions and the increasingly important role played by them around key markets such as the repo and FX swap markets.