The overlooked threats to the global financial system

financialpost.com:

Since the great financial crisis of 2007-08, regulators have engaged in the biggest push since the 1930s to de-risk the global financial system. Yet instability and flawed risk management have proved extraordinarily resistant to this regulatory onslaught.

The collapse last year of Silicon Valley Bank, the 16th largest in the United States, exposed very basic mistakes, not the least was a failure to hedge against the risk of surging interest rates undermining the value of its U.S. government bond holdings. There followed a deposit run of hitherto unimaginable speed at SVB and other regional banks.

This, together with the forced sale in Europe of failing Credit Suisse Group AG to rival UBS Group AG, prompted Agustín Carstens, head of the Bank for International Settlements, to declare that “business models were poor, risk management procedures woefully inadequate and governance lacking.”

Then there have been repeated episodes of turbulence in the US$26-trillion U.S. Treasury market, the world’s ultimate financial haven. The most extreme case was the March 2020 dash for cash as the spread of COVID-19 gathered pace. Volatility has been exacerbated by the reduction in the big banks’ market-making capability, ironically, a result of the regulatory response to the financial crisis.

In a market that provides vital support for the collateral and hedging operations of global investors, there are fears that risky hedge fund trading strategies involving large borrowings pose a constant destabilizing threat. In the meantime, the United Kingdom government bond market went into meltdown in 2022, as pension funds’ liability-driven investment strategies struggled to cope with a sudden rise in yields.

Such destabilizing activity is