The FSB Reacts to COVID-19’s Shock to the Financial System
April 14, 2020
On April 11, the Chair of the Financial Stability Board (FSB) sent a letter to the G20 Finance Ministers and Central Bank Governors updating them on the FSB’s actions to maintain financial stability given ongoing and emerging risks to the global financial system brought on by the COVID-19 crisis. FSB Chair Randal K. Quarles pointed to the FSB’s efforts to:
- Assess financial system vulnerabilities that could cause additional economic fallout from the crisis. The FSB is assessing current vulnerabilities in the financial system and providing risk assessments to policymakers. It is analyzing the resilience of: the ability of the financial system to finance the real economy, including businesses and households; the ability of market participants to obtain U.S. dollar funding, including in emerging markets; the ability of financial intermediaries to meet liquidity demands without forced asset sales; and the ability of market participants to effectively manage counterparty risks.
- Share information on financial developments, official actions, and their effects. FSB members are exchanging information daily on their financial policy responses to address the financial and economic fallout related to COVID-19, including actions to support lending, funding, and market functioning. This information sharing is helping jurisdictions to respond quickly and consistently to the effects of COVID-19 and minimize the risk of market fragmentation.
- Coordinate policy responses among FSB members and others. The FSB and standard-setting bodies are working to ensure that efforts to combat economic and financial fallout from the crisis are coordinated. This includes guiding authorities on ways to use the existing flexibility built into international standards, while also preserving collective support for these standards.
Looking beyond COVID-19, the letter also discusses ongoing FSB policy work in several areas to promote a global financial system that supports a strong recovery after the pandemic. This includes:
- Nonbank financial intermediation (NBFI). The letter states that the impact of COVID-19 on credit markets and investment funds has highlighted potential vulnerabilities. The FSB has formed a group to develop a proposal on how to organize work on NBFI going forward. Significantly, the letter states that implementation of the FSB’s 2017 policy recommendations to address structural vulnerabilities from asset management activities will continue. (The IAA commented on these recommendations.) Together with IOSCO, the FSB will assess if these recommendations have been implemented effectively.
- Supporting a smooth transition away from LIBOR. FSB work on LIBOR benchmark transition remains a priority, given that an unsuccessful transition could pose financial stability risks. The FSB has surveyed jurisdictions on benchmark transition progress, and will report on remaining challenges and ways to address them.
- Harnessing the benefits of technological innovation. COVID-19 has heightened concerns about certain aspects of technology, including cybersecurity. The FSB will produce for public comment a draft toolkit of effective practices to assist financial institutions in their cyber incident response and recovery.
- Promoting efficient and resilient cross-border payments. The FSB will continue its work to develop a roadmap to enhance cross-border payment arrangements, as inefficiencies may be an impediment to economic recovery. The letter also refers to a past public consultation report to address the risks that “stablecoin” arrangements pose.
- Evaluating the effects of reforms. The FSB is evaluating whether the too-big-to-fail reforms are working as intended.
Interested members are encouraged to join the IAA’s FSOC/Prudential Regulation Working Group.
TAGS: FSCO, Systemic Risk, LIBOR, Coronavirus