The Financial Stability Board (FSB) today published a letter from its Chair, Klaas Knot, to G20 Finance Ministers and Central Bank Governors ahead of their meeting on 15-16 July.
Current outlook for financial stability. The letter
warns that the combination of lower growth, rising inflation and tighter
global financial conditions may crystallise pre-existing
vulnerabilities in the global financial system or give rise to new ones.
In particular: rising indebtedness across sovereigns, non-financial
corporates and households; liquidity mismatches and hidden leverage in
non-bank financial intermediation; and the adverse effects of tightening
financial conditions on Emerging Market and Developing Economies
(EMDEs).
The letter outlines risks from financial strains in commodity
markets. The FSB is analysing these issues and closely monitoring the
possible spillovers from commodities markets into the broader global
financial system.
With the exit from COVID-19 well underway, it is important to rebuild
macroprudential policy space whenever national conditions allow. The
FSB is taking forward its work to bolster the resilience of the
financial system. The letter updates on this work in three areas:
COVID-19 response, climate, and crypto-assets.
COVID-19: addressing scarring and exit strategies. Accompanying this letter is a report on Exit strategies to support equitable recovery and address effects from COVID-19 scarring in the financial sector,
which the FSB published today. Vulnerabilities from the COVID-19
crisis, including ones that COVID-19 support measures prevented from
materialising, could now come to the fore at a time when policy space is
limited and firms and households have reduced financial buffers. Taken
together, these setbacks may imply that the scarring effects from the
pandemic have a greater potential to damage future growth.
The report notes that preventing scarring effects to sustainable
growth over the long term requires effective domestic policies,
containing cross-border spillovers and addressing debt overhang issues.
The report calls for the continuous assessment of impacts, interactions
and trade-offs of policies affecting the financial sector; and for
authorities to consider further whether, and how, support measures could
be made more targeted. The final report will be delivered to the G20 in
November.
The FSB’s climate roadmap. The letter sets out the
progress made on the FSB’s Roadmap for Addressing Climate-related
Financial Risks during its first year in all four key areas:
disclosures, data, vulnerabilities analysis, and regulatory and
supervisory approaches.
The letter stresses the importance of keeping this momentum up, in
particular, improving data quality, which is essential to the
identification and assessment of vulnerabilities and the development of
new policy tools. The FSB will publish its joint work with the Network
for Greening the Financial System (NGFS) on climate scenarios in
November. The FSB also plans to publish the final version of its report
on supervisory and regulatory approaches to climate-related risks in
October. Both of these are deliverables to the G20.
Regulation of crypto-assets. The recent turmoil in
crypto-asset markets has crystallised some of the vulnerabilities that
the FSB highlighted in February in its Assessment of risks to financial
stability from crypto-assets. The letter flags the FSB’s recent communication on crypto-assets,
which clarifies that so-called stablecoins and other crypto-assets do
not operate in a regulation-free space and that crypto-asset providers
must not commence operations in any jurisdiction unless they meet all
applicable regulatory, supervisory and oversight requirements.
The FSB will report to the G20 Finance Ministers and Central Bank
Governors meeting in October on regulatory and supervisory approaches to
stablecoins and other crypto-assets.