FSB Reports to G20…and it’s a Familiar Message

The Financial Stability Board (FSB) has published a letter from its chair Randal Quarles to G20 finance ministers and central bank governors ahead of their meetings in Washington this week and the message from the letter is largely the same as it has been for some time – work is progressing but more needs to be done to complete the financial reform process kicked off in 2009.

The letter does note, however, that the development of post-crisis reform policies is “nearly complete” and implementation is well underway, but it also emphasises that the FSB’s mission is far from complete. Implementation progress on agreed G20 reforms remains uneven across key reform areas, and the FSB is in the process of evaluating that reforms are working as intended. Looking ahead, the FSB says authorities need to be ready to address evolving risks to global financial stability, be they related to current downside risks to growth and uncertainties around Brexit, or structural changes in the financial system.

The letter highlights three areas of the FSB’s work, ensuring resilience in the face of new risks; potential financial stability issues from global stablecoins; and the promotion of a financial systems that supports “strong and sustainable global growth”.

On the subject of resilience to new risks, the FSB says that increasing risks meet a financial system that is much more resilient than it was before the financial crisis. It adds, however, that the long period of sustained global growth and rising asset prices may have weakened the incentives to take precautions against unforeseen events. The FSB is conducting an in-depth analysis of the markets for leveraged loans and collateralised loan obligations, as well as assessing the financial stability implications of structural changes in the financial system, including non-bank finance and technological innovation.

On the potential oxymoron that is the threat to stability from stablecoins, the FSB says stablecoin projects of potentially global reach and magnitude must meet the highest regulatory standards and be subject to prudential supervision and oversight. Possible regulatory gaps should be assessed and addressed as a matter of priority. The FSB says it has formed a working group, to inform regulatory policy approaches that harness the benefits of financial innovation, while containing associated risks for the financial system, and advise on multilateral responses as necessary through a consultative report to be presented to the G20 in April and a final report in July 2020.

Finally, following its June report on addressing instances of harmful market fragmentation the FSB has submitted a progress report to the G20 on its further work in this area. The FSB is also taking forward its multi-year programme of rigorous evaluation of post-crisis reforms. The evaluation of the effects of those reforms on small and medium-sized enterprises, is nearing completion, while the evaluation of the effects of too-big-to fail reforms for banks is underway.

Colin Lambert

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