Passing through many a storm

Global banking regulators have been on their toes steering the financial ecosystem away from repeated headwinds.

Events such as the Covid-19 pandemic-induced shutdowns, the Archegos crisis of 2021, the gilt crisis in 2022, bank failures in the US in 2023-2024 and geopolitical uncertainties have kept unleashing shock waves, which underscore the risks of a sudden shift in monetary policy and financial environment.

The prolonged low interest environment during the pandemic prompted some banks to considerably broaden their capital market offerings to riskier and less transparent counterparties in pursuit of higher yields. This resulted in complex interconnections between banks and non-banks — non-banking financial institutions (NBFIs), unregulated entities such as hedge funds and family offices — through financial instruments such as loans, securities, derivatives and funding relationships that have posed systemic risks.

Material concentration in counterparty credit risk (CCR) and the increasingly intricate and diverse linkages between banks and NBFIs, inadequate CCR risk management practices — such as insufficient monitoring of counterparty risk, failure to resolve internal limit breaches, and inadequate risk mitigation measures and risk governance framework — leading to significant failures in the past underscore the need for robust and effective CCR management.