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The Plenary discussed the financial stability implications of structural changes in the interest rate environment that have been occurring over a number of years. Such an environment over the longer term could give rise to financial stability challenges.
Members discussed a report assessing vulnerabilities associated with leveraged loans and collateralised loan obligations (CLOs). Several factors suggest that such vulnerabilities have grown since the global financial crisis, although there have been some mitigating developments. Available data indicates that banks globally have the largest direct exposures to leveraged loans and CLOs, concentrated among a limited number of large global banks, with a significant cross-border dimension. A number of non-bank investors are also exposed to these markets. A comprehensive assessment of the system-wide implications of the exposures of financial institutions to leveraged loans and CLOs is challenging, and more work is needed to close data gaps. The full report will be published by the end of the year.
The resilience of the financial system has improved as a result of regulatory reforms. Yet banks in some jurisdictions may find it challenging to raise capital at a reasonable cost in the event of negative economic and financial shocks. This may reflect pressure on their profitability in the presence of lower interest rates and, in some instances, concerns around the quality of their assets.
Most financial markets have continued to operate well despite recent episodes of short-lived stress. Widely reported outflows from funds managed by two managers did not have systemic implications. However, a future more widespread deterioration in market liquidity, or increase in volatility, could test market resilience.
The Plenary discussed developments in crypto-asset markets. Members endorsed an augmented framework for monitoring potential financial stability risks in those markets to take account of the development of so-called ‘global stablecoin’ systems, recognising that these are developing rapidly. In parallel, the FSB is examining regulatory and supervisory issues raised by global stablecoins, with a view to advising on additional multilateral responses as needed. The FSB will publish a consultative report on regulatory issues of stablecoins in April 2020.
Members also discussed the FSB’s ongoing work on market developments and potential financial stability implications from the entry of BigTech firms into finance and from third-party dependencies in cloud services.