FSB Plenary meets in Basel
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The plenary session of the Financial Stability Board (FSB) met today in a hybrid format, with some members present in person in Basel and others virtually. Members discussed vulnerabilities in the global financial system, considered issues of particular relevance to emerging markets and developing economies (EMDEs) and agreed on the FSB’s work program for 2022.
Financial Stability Outlook
The Plenary discussed the prospects for financial stability and any action needed to address identified vulnerabilities in the global financial system.
The main current vulnerabilities relate to the increase in indebtedness of states, non-financial corporations and households in response to COVID-19. These include higher indebtedness and the link between these three sectors and the financial system. Leverage built into the financial system can increase vulnerabilities, as well as the risks of accumulation in real estate in a number of jurisdictions. Supportive global financial conditions have kept debt servicing costs low and supported asset prices, against a backdrop of continued search for yield. Rising interest rates and a greater divergence in economic and financial conditions between advanced economies and EMDEs could expose some of these vulnerabilities. The FSB will continue to monitor these risks.
These developments highlight the need to strengthen the resilience of the global financial system. Liquidity mismatches, along with other factors, could put pressure on some non-bank financial intermediaries under difficult conditions. A progress report on the FSB’s work program to strengthen the resilience of non-bank financial intermediation (NBFI) was released last month. It includes initiatives to assess and address these vulnerabilities, including policy proposals to improve the resilience of money market funds. In addition, members recalled the importance of rebuilding the macroprudential policy space in the future.
Members also discussed a number of other emerging challenges. These include the exposure of the financial system to physical and transitional risks posed by climate change, and members highlighted growing vulnerabilities in the financial system due to the use of crypto assets. The FSB will provide an updated assessment of the financial stability implications of cryptoassets to the G20 in February 2022.
Scar effects of COVID-19
The extraordinary political response from the government has been essential in limiting the economic fallout from COVID-19. At the same time, the massive supply of public credit (both directly and through loan guarantees) has resulted in an unprecedented level of gross debt in non-financial corporations (although in some cases offset by a increased liquidity), as well as in other sectors of the economy. The Plenary discussed the implications for financial stability, not only of over-indebtedness, but also of the wider risk of the pandemic’s scarring effects on the financial system.
The FSB will publish a discussion paper to provide a basis for a dialogue between the public and private sectors on emerging policy approaches and industry practices that could prove effective in supporting a smooth transition out of debt distress.
Problems affecting EMDE
The FSB organized its annual EMDE Forum to discuss issues of particular interest to EMDE members of the FSB and its six regional advisory groups.
A key challenge for EMDEs is to manage the exit of COVID-19 support measures amid divergent growth patterns by region and rising long-term interest rates. Many EMDEs face trade-offs between maintaining measures to support the financing of the real economy and preserving or restoring political space. The potential cross-border fallout from a rollback of COVID-19 measures in advanced economies adds to the challenges. The Plenary also discussed the importance of addressing the possible longer-term effects of COVID-19 on the financial systems of EMDEs and preserving their ability to support economic growth.
COVID-19 has accelerated the trend towards the digitization of financial services, especially in EMDEs. This has helped mitigate the economic impact of the pandemic by facilitating remote access to financial services, but digitization is also raising new financial stability issues. Members discussed the implications for financial stability in EMDEs of accelerating digital innovation, including rapidly changing crypto-asset markets.
Implementation of resolution reforms
The Plenary discussed key issues in completing resolution reforms going forward, including follow-up work to address gaps identified in assessing the effects of reforms too big to fail for major banks. systemic. The 2021 resolution report, which marks the tenth anniversary of the adoption of the CSF Key attributes of effective resolution regimes for financial institutions, will be published in early December.
FSB work program
Members discussed the FSB’s work program for 2022, including deliverables for Indonesia’s G20 Presidency. The main priorities of the FSB’s work include: (i) international cooperation and coordination in the response of financial authorities to COVID-19; (ii) strengthening the resilience of the NBFI sector and follow-up to the FSB’s holistic review of the market turmoil of March 2020; (iii) contain the risks associated with the use of crypto technology, including non-backed crypto assets, stablecoins and decentralized finance, while exploiting the benefits; (iv) assess and deal with the financial risks linked to climate change; and (v) finalizing and monitoring the implementation of post-crisis 2008 reforms. The finalized work program for 2022 will be published in January.
Plenary members expressed their gratitude for Randal Quarles’ leadership and commitment to chair the FSB over the past three years, and look forward to working with Klaas Knot, who will take over the FSB chair on December 2, 2021.
The FSB coordinates the work of national financial authorities and international standard-setting bodies at the international level and develops and promotes the implementation of effective regulatory, supervisory and other policies of the financial sector in the interest of financial stability. . It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, international sectoral groupings of regulators and supervisors and expert committees of central banks. The FSB also carries out outreach activities with around 70 other jurisdictions through its six regional advisory groups.
The FSB is chaired by Randal K. Quarles, Governor of the US Federal Reserve; the deputy chairman of the FSB is Klaas Knot, chairman of De Nederlandsche Bank. The FSB secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.