Fragmentation of financial regulation hindering Covid response

HONG KONG: Banks’ obligations to keep cash “ring-fenced” within countries could reduce lending to Asian economies grappling with the fallout from the new coronavirus outbreak, a financial industry group said in a report.

The need to run separate and different systems in different jurisdictions is a long-standing complaint of banks and asset managers, particularly in Asia where many operate in several markets.

This fragmentation has been thrown into sharp relief by the Covid-19 pandemic as it could limit banks ability to lend to companies in countries hard hit by the virus, said the Asia Securities and Financial Markets Association, which represents some of the world’s largest banks and asset managers.

Global economic losses caused by the coronavirus pandemic are expected to run to trillions of dollars.

“Before the pandemic, there was an arms race between jurisdictions to ringfence capital in their markets,” said Matthew Chan, an author of the report, which cites regulation in India and Singapore as examples.

Regulators typically imposed these rules after the global financial crisis requiring banks to keep certain levels of funds within markets so failing institutions could be more easily managed, but the report says this has consequences.

“As governments reduce economic support there will be a requirement for banks to lend, but if international firms can’t deploy capital across borders because they must hold it in one market, you might see more fragility in the international economic system,” said Chan.

The report said regulators’ responses to the crisis had also caused some fragmentation as they adopted different rules – for example about short selling and handling of documents – making life difficult for bankers working remotely and sometimes across borders.

However, it welcomed the decision by standard setting bodies to collectively delay implementation of some other major global regulatory initiatives. — Reuters
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