The new financial order in the post-epidemic era -Part 4

Market-based financing is an obvious gap in the prudential regulatory framework. The main challenge of applying prudential supervision is to quantify the system cost in times of stress. The following are three areas of supervision that require further analysis:

1. Re-examine the supervision of Money Market Funds (MMF) and their role in the financial system to ensure that the central bank does not need to bail them out;

2. Under normal circumstances, increase the margin requirements so that the margin increase in times of stress is small;

3. Ensure that the core of the system remains stable, reduce procyclical behavior, and further solve the problem of convergence between banks and NBFIs, so that banks can suppress the risk-taking behavior of NBFIs on a daily basis.

By strengthening key nodes and reducing intermediaries’ dependence on traders, liquidity services can be made more robust. In addition, it is possible to modify the stress testing method for individual funds or industries, and explore the method of stress testing of the whole system. Of course, to do this, it is necessary to increase the transparency of NBFIs. The March turmoil clearly demonstrated the need to strengthen the resilience of the NBFIs industry, which is also an important topic discussed by the Financial Stability Board (FSB) in its 2021 work plan.