Financial "plumbing" needs attention – or a burst could wreck everything

11-Dec-2013 @ 14:0

Kay Swinburne Kay Swinburne

Anthea McIntyre Anthea McIntyre

Anthea McIntyre Anthea McIntyre

Financial businesses outside the banking sector are potentially just as vulnerable to market stress – and so must be able to demonstrate proper governance and robust risk-management in just the same way.

That is why a report which Conservative MEPs are piloting through the European Parliament seeks to bolster the safety and stability of the whole financial system.

Conservative MEPs believe that, although it was only banks which disastrously failed during the last financial crisis, there is no intrinsic reason why other financial institutions might not potentially prove equally susceptible – and their failure could prove equally damaging to the system as a whole.

A report by Conservative MEP Kay Swinburne, herself a former merchant banker, was approved by the parliament in Strasbourg today. It stresses that all financial market participants – not only the banks -need a better understanding of how their business would function – or even bewound down in an orderly fashion – if they fell victim to financial stress.

It emphasises that non-banks operating as part of the so-called "critical market infrastructure" (CMI) must employ rigorous standards of governance and risk management for the benefit of the system as a whole.

The MEP for Wales said: "While the work on recovery and resolution of banks has undergone a lot of international work, less has been done to ensure the stability of our critical market infrastructure. Yet the level of interconnectedness of our entire financial system is increasing and has been identified as a future weakness in the financial markets as a whole.

"We have seen what happens when one bank goes down,we have not yet seen what happens when a piece of critical market infrastructure collapses – and I hope we don’t any time soon.

The report looks in particular at the possible failure of central clearing houses and settlement systems, and calls for further study of infrastructure risk in other sectors such as insurance and asset management.

Dr Swinburne said: "As those sectors evolve and expand beyond their traditional activities, supervisors will need to keep a close eye out to see whether stronger action might be necessary

"Having safe, sound market infrastructure is critical to allowing capital to flow through our economy. It is the plumbing that delivers the assets to where they need to be.

"And as any householder knows, it only takes one small pipe to burst for the whole building to suffer damage."

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