By Huw Jones
LONDON (Reuters) -Higher interest rates have so far not seriously undermined the global financial system, but "there is work to do" in tackling liquidity issues and hidden leverage in the non-bank sector, Financial Stability Board chair Klaas Knot said on Thursday.
The non-bank financial intermediary (NBFI) sector, which now accounts for about half of global financial assets and includes investment funds, has had pockets of leverage coming to the fore which previously had not been spotted by regulators, Knot said.
"Why did we not see these pockets of hidden leverage? That, I think, is still the main target of our work in the NBFI space going forward," Knot said.
The banking industry was in turmoil earlier this year as several U.S. lenders collapsed, including Silicon Valley Bank, and UBS was forced to take over Swiss rival Credit Suisse.
Knot, who is also governor of the Dutch central bank and a European Central Bank (ECB) policymaker, said the reasons behind difficulties at those banks were due to "idiosyncratic factors" and not systemic failures.
"In general the massive change in the interest rate environment, so far so good, there has not been any systemic rippling of negative effects into the financial sector," Knot told the Institute of International Finance annual meeting.
The FSB, made up of central bankers, regulators and treasury officials from G20 economy countries, has already begun tightening rules for money market funds and open ended funds.
Earlier this week, the Bank of England flagged tougher liquidity rules for money market funds, while the UK's Financial Conduct Authority is looking at valuations in private markets.
"The combination of liquidity mismanagement plus hidden leverage, that I think has given rise to the instabilities that we observed in the NBFI space... We are not done yet."
The ECB is due to decide whether to push ahead with issuing a digital version of the euro currency, and Knot said it would not dramatically change business models of banks, if it went ahead.
Meanwhile, AI could have tangible benefits and present some risks to the financial system, he said.
"It is going to be important, it is going to have a meaningful impact on the financial system so we have to continue to be on top of it."