Sunday, July 24, 2016

FSB Chair Reports to the G20

While Much Progress has been Made, There is Much Left to Do

Author: David Schwartz J.D. CPA

In a July 19, 2016 letter to the G20 Finance Ministers and Central Bank Governors ahead of their meeting July 23-24 meeting in Chengdu, Financial Stability Board Chair and Governor of the Bank of England Mark Carney updated the G20 leaders on the FSB’s progress made and priorities going forward.  While touting successes, he also said that there was work yet to be done and urged global regulators and standard-setters to finish the job of implementing post-crisis reforms.  


Carney noted that this year the global economy and financial system had navigated successfully two “spikes in uncertainty and risk aversion.”  


"The first reflected downward revisions to the expected medium term growth prospects of the world economy as a result of renewed appreciation of the structural challenges facing a number of G20 economies. In the financial sector, the volatility also reflected concerns that many banks have more to do to adjust their long-term business models to a lower growth and nominal interest rate environment and strengthened international regulatory framework. The second episode, occurring in recent weeks, reflects uncertainty over the potential implications of the UK’s vote to leave the European Union. It may take time for the ramifications of the vote to be fully understood."


Mr. Carney credited G20 reforms already in place for preventing these events from hampering the function of the financial system and effectively dampening any “aftershocks from these events rather than amplifying them.” According to Carney, thanks to these reforms, financial markets are more robust and resistant to shocks, large financial institutions are better capitalized, and liquidity requirements have left them better ale to continue lending in stressed conditions. 


Despite the apparent success of G20 reforms, Mr. Carney stressed that “we cannot allow this resilience to foster complacency.”  These recent events were important tests of post-crisis reforms already in place, and their effectiveness is encouraging; however, the events also highlight the importance of finishing the job and of the “ongoing work of the FSB to address potential structural vulnerabilities in some aspects of market-based finance."


With this in mind, the letter outlines the progress the FSB is making in advancing its priorities for 2016:


  1. Promoting a coordinated program of reforms to deliver resilient sources of market-based finance, including addressing structural vulnerabilities associated with asset management activities;
  2. Developing robust financial market infrastructure, including assessing policies on central counterparty resilience, recovery and resolvability, and recommending any necessary improvements; and
  3. Supporting effective macroprudential arrangements, by drawing lessons from national experiences of the practical application of macroprudential policy frameworks and tools working in partnership with the International Monetary Fund and Bank for International Settlements.


Alongside these current priorities, the FSB also plans to focus on:


  1. Pursuing the full and consistent implementation of post-crisis reforms, while addressing material unintended consequences;
  2. Addressing new and emerging vulnerabilities in the financial system, including those associated with conduct, correspondent banking, and climate change; and
  3. Monitoring the potentially systemic implications of financial technology innovations, and the systemic risks arising from operational disruptions. 


Mr. Carney’s letter to the G20 is available here.