The FSB discussed the current strains in financial markets arising from sovereign debt. The European Central Bank, European Commission and International Monetary Fund briefed the Board on the ongoing policy discussions to address the heightened risks. Sovereign and financial system risks are closely entwined. Relevant governments must act forcefully to strengthen fiscal positions and bolster competitiveness through structural reforms within concrete timetables. The financial industry must continue to repair and strengthen balance sheets to rebuild resilience to shocks.

The FSB reviewed the publication of the results from the European bank stress test exercise. The stress tests provide additional transparency on risk exposures. The FSB will continue to monitor carefully market developments and actions to strengthen bank balance sheets, and will work together closely to support financial stability.

Key financial regulatory reforms:

Addressing systemically important financial institutions (SIFIs). The FSB reviewed two consultative papers, to be published in the coming days, that will take forward work under the FSB’s initiative to address the systemic and moral hazard risks arising from SIFIs:

• The first consultative paper will set out a methodology for assessing the global systemic importance of banks and the magnitude of additional loss absorbency that globally systemic banks will be required to have. It also describes the instruments that can be used to meet the loss absorbency requirement.

• Shadow banking. The FSB discussed progress in the work to strengthen the oversight and regulation of the shadow banking system. To enhance the monitoring of the shadow banking system, members agreed to conduct a data-sharing exercise in the coming months, which could lay the basis for data collection and assessment by the FSB of global trends and risks from 2012 onwards. Members also agreed to conduct work to assess the case for additional regulatory action in five areas: banks’ interaction with shadow banking entities; money market funds; other shadow banking entities; securitisation; and securities lending and repos.

• Reforming over-the-counter (OTC) derivatives markets. The FSB reviewed the progress, inconsistencies and gaps in the implementation of reforms, covering standardisation, central clearing, exchange or electronic platform trading, and reporting to trade repositories, and will review progress in preparation for the G20 Summit. The FSB encouraged further work by standard-setters on margining requirements for non-centrally cleared OTC transactions, and on data reporting requirements for trade repositories.

• Creating a global “legal entity identifier” system. The FSB welcomed the progress of financial regulators and industry to establish a single global system for uniquely identifying parties to financial transactions, and agreed to arrange a workshop in the autumn to discuss the issues that will need to be addressed and how best to coordinate work to take this forward.

• Accounting convergence. The FSB reviewed progress towards convergence by the International Accounting Standards Board and the US Financial Accounting Standards Board, including steps to a common approach to provisioning based on expected losses.

Press release