Policymakers and cross-border financial institutions should pay more attention to funding risks, suggests a report released Wednesday.

The report from the group of central bank officials known as the Committee on the Global Financial System examines the functioning and resilience of cross-border funding markets. It was prepared by a joint study group of the CGFS and the Markets Committee, and was chaired by Guy Debelle of the Reserve Bank of Australia.

The report finds that, “The build-up of maturity mismatches within and across currencies was a major vulnerability and should be better monitored and managed.” The principal threat to stability was not cross-border activity, but the inadequate recognition and management of the related risks of that activity, it says, especially the risks arising from relying on short-term funding, and exposure to potentially illiquid assets.

“In addition to bank-by-bank monitoring, it is important to assess potential mismatches at a more aggregate level and gather better information on off-balance sheet activities,” it says.

The report also advises that it’s crucial to enhance the resilience of core currency funding markets beginning with upgrades to market infrastructure. And, it says that policymakers “should consider developing tools to address systemic cross-border funding pressures. While central bank swap and repo lines have been an effective remedy for the global-scale foreign currency liquidity shortages in the recent crisis, other measures such as cross-border collateralisation and regional swap arrangements with pooled reserves may be more suitable in other scenarios.”

Finally, the report observes that, notwithstanding the funding disruptions, the foreign exchange market’s infrastructure demonstrated its’ resilience. “While initiatives to upgrade market infrastructure should be welcomed, care should be taken not to let reform efforts inadvertently undermine markets that have proved to function well,” it says. Nevertheless, it also suggests that central counterparty clearing for the foreign exchange market “warrants further investigation”.

IE