March 26, 2015 / 7:09 PM / 4 years ago

G20 watchdog to study bond market liquidity, asset managers

FRANKFURT (Reuters) - The global financial system is safer but there is no room for complacency because of concerns about the international bond market, Financial Stability Board Chairman Mark Carney said on Thursday.

Mark Carney, the governor of the Bank of England gives the bank's quarterly GDP and inflation forecasts at the Bank of England in London, February 12,. 2015. REUTERS/Pool/Antony Devlin

The FSB coordinates financial regulation for the Group of 20 leading economies (G20) and has been introducing tougher rules for banks and markets to plug gaps highlighted by the 2007-09 financial crisis.

Carney, who is also governor of the Bank of England, said the financial system was now safer, simpler and fairer but there were concerns about liquidity, or the ability of investors to sell bonds smoothly.

Policymakers worry that interest rate hikes could trigger a stampede among investors to dump bonds at the same time.

“Market adjustments to date have occurred without significant stress. However, the risk of a sharp and disorderly reversal remains, given the compressed credit and liquidity risk premia,” Carney told a news conference after a meeting of the FSB.

The FSB said members were concerned about the growth of assets at funds that offer on-demand redemptions while investing in less liquid assets.

It has agreed to identify financial stability risks associated with market liquidity in fixed income markets and asset management activities and will make policy recommendations as necessary after initial findings are discussed in September.


The FSB has already published plans requiring the world’s top 30 banks like Goldman Sachs and HSBC to issue bonds that could be written down to “bail-in” the lenders if they get into trouble.

Seen as the final major reform for ending “too big to fail” banks, the bonds are known as total loss absorption capacity or TLAC and would be equivalent to 16-20 percent of a bank’s risk weighted assets.

Carney said lenders should expect the final version or term sheet to look “very similar” to the draft plans when G20 leaders endorse them at a summit in November, despite banks challenging key elements.

“I wouldn’t expect those more fundamental questions, which goes against the principles behind TLAC, to be reflected in an adjustment of the final agreement,” Carney said.

He hinted at some flexibility in implementation, however,

“As well, I would underscore that the term sheet is a range — and there is a beginning and end to that range, so that is relevant as well,” Carney added.

Standard & Poor’s has estimated that the 30 banks will have to issue more than $500 billion in bonds to comply with TLAC.

Reporting by Paul Carrel and Frank Siebelt; Writing by Huw Jones; Editing by Catherine Evans

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