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The FSB held its third annual EMDEs Forum to discuss the regulatory reform agenda and its effects for EMDE members of the FSB and its six Regional Consultative Groups, as well as financial stability issues of particular relevance to them. The meeting discussed actions being taken in response to issues raised at last year’s EMDEs Forum, including aspects of Basel III and the reforms to OTC derivatives markets. It also considered other developments affecting EMDE financial systems, including international work to address the pullback from correspondent banking and the potential of FinTech in expanding financial inclusion.
The Plenary discussed current and emerging financial system vulnerabilities and noted that:
High and rising levels of domestic and foreign currency debt in many countries, potential increases in long-term interest rates and exchange-rate developments are leading to tightened financial conditions for some sovereign and corporate borrowers.
Commercial and residential real estate valuations are elevated in some jurisdictions, raising concerns over real estate asset quality in a rising rate or slowing growth environment.
Uncertainty over the path of future interest rates may pose significant, but varied, risks to banks and institutional investors. Shifts by insurers and pension funds into higher-risk assets raise concerns about losses and portfolio rebalancing when the credit cycle turns.
The Plenary reviewed the outcomes of a pilot systemic stress simulation exercise, examining fixed-income market liquidity resilience across a number of markets, and of a workshop on systemic stress, investor behaviour and market liquidity. The work is being conducted as part of the FSB’s vulnerabilities work, and is intended to better understand the consequences of market stresses, and not as a driver for policy development. The simulation examines stresses on the financial system as a whole, rather than on individual firms.
The FSB’s work is increasingly focused on monitoring implementation and evaluating the effects of G20 financial regulatory reforms. The Plenary reiterated the importance and benefits of effective and consistent implementation, supported by transparent assessments by peers of the effectiveness and steps that jurisdictions have taken to implement the reforms. The Plenary discussed emerging findings from reviews in two core reform areas:
A review of the evolution of shadow banking risks since the financial crisis and the adequacy of monitoring and policy tools put in place after the crisis to address them.
A review of the implementation of OTC derivatives markets reforms, including the effects and effectiveness of these reforms.
The FSB discussed an interim report that seeks to quantify interdependencies between central counterparties (CCPs), major clearing members and financial service providers and the resulting systemic implications. This analysis will inform the work on CCP resilience, recovery planning and resolvability. The Plenary agreed to continue to monitor the interdependencies in central clearing and conduct another analysis in due course.
In February the FSB published a consultation on guidance for CCP resolution and resolution planning as part of a joint workplan with the Basel Committee on Banking Supervision (BCBS), Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) to coordinate international policy work aimed at enhancing the resilience, recovery planning and resolvability of CCPs. The guidance will be sent to the Summit for final endorsement.