(Bloomberg) -- The chair of the world’s most powerful financial regulator has warned politicians that they could spend most of their time “drawing up rescue plans for an economy in free fall” if they prioritize other public policy areas over safeguarding the financial system.
The stark warning from Klaas Knot, governor of the Dutch central bank and chair of the Financial Stability Board charged with preserving the soundness of the financial system, comes amid growing global pushback against measures agreed to keep the financial system safer.
In the US, regulators have dramatically watered down plans to impose higher capital requirements on banks after the proposals sparked outrage. In the European Union, the bloc’s three biggest economies have called on leaders to pause reforms and revisit some measures that could hurt competitiveness.
“It seems that, 16 years after Lehman, implementation fatigue has started to set in,” Knot told an audience at an event at Bloomberg’s headquarters in New York, without calling out any particular jurisdiction’s behavior.
Knot warned that financial stability could be “taken for granted” in times of calm and left to technicians to handle because “there are so many other policy priorities for governments.”
“That would be a mistake,” he said, adding that financial stability is the foundation for almost all public policy. “If financial stability is gone, as a government you can forget about the other policy priorities. You will spend most of your time drawing up rescue plans for an economy in free fall.”
Plans agreed but not yet implemented include the final package of post-crisis banking reforms which curb institutions’ discretion to assess how much capital they need for certain activities. There are also new packages on things like the funds industry.
Knot said the agreed measures are “needed to address existing vulnerabilities — vulnerabilities that could lead to the next crisis, if they are allowed to persist.”
The Dutch central banker and other regulators have spoken frequently about new risks that have emerged since the financial crisis, including the non-bank financial sector which now holds around half the global system’s assets.
“The financial system is always evolving, so our policy also needs to evolve,” he said.
--With assistance from Jana Randow.
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