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FSB report outlines eight recommendations for bank liquidity preparedness
On April 17, the Financial Stability Board (FSB) released a consultation report titled “Liquidity Preparedness for Margin and Collateral Calls,” which laid out eight policy recommendations intended to enhance the liquidity preparedness of nonbank market participants in certain markets. These policy recommendations came from several reviews by the Basel Committee on Banking Supervision, the Committee on Payments and Market Infrastructures, and the International Organization of Securities Commissions analyzing recent incidents of liquidity stress. The eight recommendations comprised liquidity risk management, liquidity stress testing, and collateral management practices.
The first three recommendations focused on liquidity risk management practices. The first recommendation would amend liquidity risk management and governance frameworks to protect against spikes in margin and collateral calls in liquidity risk management; the second recommendation would ensure liquidity needs by establishing liquidity risk appetites and a contingency funding plan; and the third recommendation outlined the need for regular reviews of liquidity risk frameworks.
The next two recommendations were on liquidity stress testing and scenario design. The fourth recommendation set out the need for conducting liquidity stress tests with respect to margin and collateral calls to identify the sources of liquidity strains. The fifth called for stress tests to cover a range of “extreme but plausible” scenarios.
The last three recommendations focused on collateral management practices. The sixth recommendation called for resilient and effective operational processes and collateral management practices; the seventh set out the need for sufficient cash and readily available diverse liquid assets and collateral arrangements; and the eighth called for active, transparent and regular interactions with counterparties and third-party service providers. The FSB will welcome comments on this report submitted before June 18.
FSB report addresses financial risk concerns with third-party relationships
On December 4, the Financial Stability Board (FSB) published a report titled “Enhancing Third-Party Risk Management and Oversight: A Toolkit for Financial Institutions and Financial Authorities,” as summarized in this press release. The report provides a toolkit that: (i) defines common terms to improve consistency among financial institutions, including “third-party service relationship,” “service provider,” and “critical service,” among others; (ii) outlines tools for financial institutions to identify critical third-party services and manage potential risks throughout the service lifecycle, onboarding and monitoring of service providers, and reporting incidents, among others; and (iii) outlines tools for financial authorities to manage third-party risks, including how to identify third-party dependencies and potential systemic risks. In preparing the report, the FSB received public feedback over the past summer regarding risk concerns stemming from outsourcing and third-party service relationships.
Treasury issues statement on U.S.-UK Financial Regulatory Working Group biannual meeting
On September 29, the Department of Treasury issued a statement on the U.S.-UK Financial Regulatory Working Group, comprised of officials from both countries, and its meeting to discuss key themes including: (i) economic stability; (ii) banking issues; (iii) non-bank sector developments; (iv) climate-related financial risks; (v) international engagement; and (vi) digital finance.
In their meeting, participants discussed international banking regulations, specifically Basel III, emphasizing the importance of consistent global implementation. They also acknowledged ongoing work by the Financial Stability Board (FSB) and Basel Committee on Banking Supervision regarding lessons learned from events in March 2023, with a focus on bank resolution. In addition, the group deliberated on the urgency of strengthening resilience within the non-bank financial intermediation (NBFI) sector. Topics included national reforms related to money-market funds, forthcoming work by the FSB to address vulnerabilities linked to leverage in the NBFI sector, and the value of globally implementing reforms in this sector to maintain financial stability. Among other topics, the group also noted progress in climate-related financial risks and sustainable finance mandates.
The group emphasized the importance of international cooperation and agreed to meet again in 2024 to continue their dialogue. Established in 2018, this biannual dialogue aims to enhance financial stability, investor protection, market efficiency, and capital formation in both countries.
FSB reports on stablecoins and crypto-asset activities
Recently, Financial Stability Board (FSB) Chair Klaas Knot sent a letter to the G20 Finance Ministers and Central Bank Governors concerning global financial stability, followed by the release of two FSB reports. The letter stated that “turmoil in crypto-asset markets has validated many of the FSB’s concerns about crypto assets,” and noted that the “‘crypto winter’ has reinforced [its] assessment of existing structural vulnerabilities.” The letter expressed concerns that the risks crypto assets pose to financial stability are "likely to come back to the fore sooner rather than later.” Knot stated that the FSB’s report on stablecoins expanded recommendations for the regulation of stablecoins, which are digital tokens that aim to maintain a one-on-one value with less volatile assets such as the euro or dollar. In the stablecoin report, the FSB stated that most existing stablecoins would not meet its recommendations at present, and would require “significant improvements” to their governance, risk management, stabilization mechanisms and disclosures. Knot also discussed the FSB's report on crypto-asset activities and markets, which focuses on regulatory, supervisory, and oversight issues relating to crypto-assets to help ensure safe innovation. The report noted that “[c]orrelations between crypto-asset prices and mainstream equity indices have been steadily increasing since year-end 2021 and peaked in May 2022, when the market stress began.” The letter further described that in 2020, G20 Leaders endorsed the Roadmap for Enhancing Cross-border Payments to address the frictions that payments currently face, and thereby achieve faster, cheaper, more transparent and more inclusive cross-border payment services. As previously covered by InfoBytes, Knot stated that the recent FSB report on the roadmap presents “priorities for this new phase of the work, and proposes an intensified public-private sector collaboration to take this forward.” In regard to cyber risks, he stated that cyber-risk safeguards are important due to rapidly growing cyber incidents. He further stated that the FSB “is working to promote a resilient global financial system in the near term and over the longer run, supporting policymakers in the G20 to foster stronger, equitable and inclusive growth.”
FSB releases G20 roadmap for enhancing cross-border payments
On October 10, the Financial Stability Board (FSB) published its priorities for the next phase of work under the G20 Roadmap for Enhancing Cross-Border Payments. According to the FSB, the plan includes steps to strengthen external engagement during the next phase of the group’s work. The FSB noted three priorities for the payment program’s next phase, which include: (i) payment system interoperability and extension; (ii) legal, regulatory and supervisory frameworks; and (iii) cross-border data exchange and message standards. The FSB further noted that it will coordinate work to develop further details of the actions that will take place to follow through with the plan, including discussions with industry participants. The updated roadmap will be provided during the first G20 Finance Ministers and Central Bank Governors meeting in 2023.
FSOC releases fact sheet on climate-related progress
On July 28, the Financial Stability Oversight Council (FSOC) released a Fact Sheet detailing the progress made to-date by the FSOC’s members in implementing the climate-related financial risk report’s recommendations. As previously covered by InfoBytes, in October 2021 the FSOC released a report, Report on Climate Related Financial Risk, identifying climate change as an emerging threat to financial stability and issued over 30 related recommendations to financial regulators. According to the Fact Sheet, the FSOC has made substantial progress since the October 2021 report by: (i) enhancing public climate-related disclosure; (ii) assessing and mitigating climate-related risks that could threaten U.S. financial stability; (iii) building capacity and expanding efforts to address climate-related financial risks; and (iv) filling climate-related data and methodological gaps.
FSB highlights crypto threats to global financial system
On July 11, the Financial Stability Board (FSB) outlined challenges and vulnerabilities facing the global financial system in a letter sent to G20 finance ministers and central bank governors. While recognizing that markets have seemingly coped with “evolving economic conditions and high volatility in an orderly manner” and that so far “[n]o major financial institution has shown signs of distress,” the FSB cautioned that vigilance is necessary, as unexpected economic deteriorations may test financial resilience. Among other topics, the FSB discussed targeted approaches for phasing out of Covid-19 measures to mitigate the adverse effects of high debt, and stressed that “[e]xit strategies need to reflect specific domestic economic conditions and avoid excessive financial market reactions, which may limit the scope to engineer a fully synchronized exit across jurisdictions.” Crypto-assets also create vulnerabilities, the FSB added, pointing to a recent FSB communication that clarified that stablecoins and other crypto-assets “do not operate in a regulation-free space” and warned crypto-asset providers that they may not operate in any jurisdiction without meeting applicable regulatory, supervisory, and oversight requirements. The FSB will take enforcement action against members that fail to comply with existing legal obligations, it said, adding that it is currently working to ensure that crypto-assets are subject to regulation and supervision through coordinated regulatory initiatives. Additionally, the FSB noted it is closely collaborating with standard-setting bodies, including the Financial Action Task Force, to regulate and supervise stablecoins and other crypto-assets and understand the implications of decentralized finance on financial stability. Consultative reports discussing recommendations for global regulatory and supervisory approaches to stablecoins and other crypto-assets will be submitted in October to the G20 finance ministers and central bank governors.
FSB releases report on climate-related financial risks
On July 14, the Financial Stability Board (FSB) released its 2022 Progress Report on the FSB’s work to implement a roadmap for addressing climate-related financial risks. As previously covered by InfoBytes, in July 2021 the FSB released the Roadmap, which focused on four interrelated areas: (i) public corporate disclosures to be used as the basis for pricing and managing climate-related financial risks (by companies internally and market participants); (ii) consistent metrics and disclosure data that can “provide the raw material for the diagnosis of climate-related vulnerabilities”; (iii) a systematic assessment of climate-related financial vulnerabilities; and (iv) the establishment of regulatory and supervisory practices and tools to allow authorities to effectively identify such climate-related financial risks. The recently released report noted “encouraging progress” toward establishing global baseline climate reporting standards, with the newly established International Sustainability Standards Board issuing exposure drafts addressing climate and general sustainability-related disclosure statements. The FSB also noted its commitment to improving the availability and cross-border comparability of climate-related data. Additionally, the report found that using climate scenario analysis to monitor climate-related vulnerabilities “can help the monitoring of financial risks to appropriately account for the longer time horizons that climate-related risks may involve.” As to regulatory and supervisory practices and tools, the FSB noted that “[f]inancial authorities should continue to embed the supervision of climate-related risks into overall supervisory frameworks, including the further development of the use of climate scenario analysis and stress testing exercises.” The FSB acknowledged that “the understanding of the financial risks arising from climate change and the policy approaches needed to address them remains at an early stage,” and that “there continues to be a need for strong international coordination of actions in the coming year (and beyond) because of the importance of this issue for the global financial system.”
FSB releases statement on crypto-asset activities
On July 11, the Financial Stability Board (FSB) released a statement regarding international regulation and supervision of crypto-asset activities following the “recent turmoil in crypto-asset markets.” The FSB called for “an effective regulatory framework” to “ensure that crypto-asset activities posing risks similar to traditional financial activities are subject to the same regulatory outcomes, while taking account of novel features of crypto-assets and harnessing potential benefits of the technology behind them.” The statement also called for, among other things: (i) crypto-assets and markets to be subjected to effective regulation and oversight relative to their domestic and international risks; (ii) cryptocurrency service providers to ensure compliance with existing legal obligations in the jurisdictions where they operate; and (iii) stablecoins to be subject to “robust” regulations and supervision if they are to be adopted as a widely used means of payment or play an important role in the financial system. The FSB noted the “ongoing work of the FSB and the international standard-setting bodies to address the potential financial stability risks posed by crypto-assets,” and highlighted that member authorities will implement applicable international standards into national regulatory and supervisory frameworks “to the extent not already reflected and will adopt guidance, recommendations and best practices of international standard-setting bodies.”
Financial Stability Board informs G20 of 2022 priorities
On February 14, the Financial Stability Board (FSB) sent a letter to the G20 finance ministers and central bank governors outlining several priorities for 2022 and setting the groundwork for promoting global financial resilience during the upcoming year. The FSB stated that the “transition path to a post-pandemic economy remains highly uncertain,” and warned that Covid-19 continues to weigh on the global economy with “[n]ew waves of infections … contribut[ing] to an uneven recovery across regions, higher inflation, and record-high debt levels globally.” The FSB also observed that, while banks and financial market infrastructures were able to absorb the macroeconomic shock of the pandemic, the nonbank financial intermediation sector (NBFI), which currently represents nearly half of global financial assets, experienced acute stress and needs to be strengthened. A resilient NBFI sector would reduce the need for extraordinary central bank intervention, the FSB stated. The FSB’s plans include prioritizing its work in this space in coordination with other standard-setting bodies to address any shortcomings and develop a systemic approach to the NBFI sector. Another priority is addressing potential financial stability risks associated with rapidly developing crypto-assets and digital innovation. The FSB observed that “[c]rypto-asset markets are fast-evolving and could reach a point where they represent a threat to global financial stability due to their scale, structural vulnerabilities and increasing interconnectedness with the traditional financial system.” Financial risks resulting from climate change are another critical area of concern for the FSB. The FSB’s work this year will include ensuring these risks are properly reflected in all financial decisions related to disclosures, data, vulnerabilities analysis, and regulatory and supervisory approaches.