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FSB reports on nonbank resilience efforts
On November 1, the Financial Stability Board (FSB) released a report providing an update on its efforts to enhance the resilience of nonbank financial intermediation. According to FSB’s report, Enhancing the Resilience of Non-Bank Financial Intermediation, the non-bank financial intermediation (NBFI) sector has become more diverse and grown significantly to nearly half of global financial assets, compared to 42 percent in 2008. The report, among other things, provided an overview of the NBFI ecosystem and a framework for analyzing the availability of liquidity and the effective intermediation under stressed market conditions. The report noted that FSB’s “main focus of work to date” is intended “to assess and address vulnerabilities in specific areas that may have contributed to the build-up of liquidity imbalances and their amplification,” which includes, among other things: (i) enhancing money market fund resilience through policy work; (ii) assessing liquidity risk and its management in open-ended funds; (iii) examining the structure and drivers of liquidity during stress in government and corporate bond markets; (iv) examining “the frameworks and dynamics of margin calls in centrally cleared and non-centrally cleared derivatives and securities markets, and the liquidity management preparedness of market participants to meet margin calls”; and (v) assessing the fragilities in USD cross-border funding and their vulnerabilities in emerging market economies interactions. Based on these findings, the report noted that FSB’s future work will pursue a systemic approach to NBFI, which involves expanding the understanding of systemic risks in NBFI and ensuring that the current policy toolkit is adequate and effective from a system-wide perspective.
FSB addresses climate-related financial risks
On July 7, the Financial Stability Board (FSB) released several reports addressing climate-related financial risks. The FSB Roadmap for Addressing Climate-Related Financial Risks noted that a growing number of international initiatives are underway that address financial risks resulting from climate change. “Effective risk management at the level of individual companies and financial market participants is a precondition for a resilient financial system,” the report stated, adding that the “interconnections between climate-related financial risks faced by different participants in the financial system reinforce the case for coordinated action.” Among other things, the FSB set out a roadmap that focuses on four interrelated areas: (i) firm-level disclosures that should be used as the basis for pricing and managing climate-related financial risks at the level of individual entities and market participants; (ii) consistent metrics and disclosure data that can “provide the raw material for the diagnosis of climate-related vulnerabilities”; (iii) an analysis of vulnerabilities to provide the groundwork for designing and applying regulatory and supervisory framework and tools; and (iv) the establishment of regulatory and supervisory practices and tools to allow authorities to effectively identify climate-related risks to financial stability. FSB also released the Report on Promoting Climate-Related Disclosures, following a survey of members which explored national and regional current or planned climate-related disclosures. FSB presented several high-level recommendations, including, among other things, that financial authorities use a framework based on recommendations from the Task Force on Climate-Related Financial Disclosures (TCFD) across both non-financial corporates and financial institutions to propose a more consistent global approach. FSB issued another report entitled, The Availability of Data with Which to Monitor and Assess Climate-Related Risks to Financial Stability, that suggested various priorities to address climate-related data gaps “to improve the monitoring and assessment of climate-related risks to financial stability.”
Additionally, Federal Reserve Board Vice Chair for Supervision, Randal K. Quarles, spoke before the Venice International Conference on Climate Change on July 11, in which he discussed the work of the TCFD and stressed the importance of improving data quality and addressing data gaps, as well as ultimately establishing "a basis of comprehensive, consistent, and comparable data for global monitoring and assessing climate-related financial risks."
FSB Releases Status Report Addressing Decline in Correspondence Banking
On December 19, the Financial Stability Board (FSB) announced the release of a progress report and 2017 workplan to assess and address the decline in correspondent banking. According to the FSB, a decline in the number of correspondent banking relationships is a source of concern for the international financial system because, among other reasons, “it may affect the ability to send and receive international payments, or drive some payment flows underground.” The FSB’s report discusses the FSB’s November 2015 four-point action plan to “assess and address” this concern and highlights actions taken by the FSB over the last five months, including:
- FSB efforts to collect both bank-level and aggregate country-level data on the number of correspondent banking relationships and aggregated transaction amounts by country and currency for approximately 300 banks in some 50 jurisdictions in order to understand in more detail the scale of withdrawal from correspondent banking, its causes and effects.
- The Financial Action Task Force (FATF’s) publication of guidance on correspondent banking, which clarifies that the FATF Recommendations do not require financial institutions to conduct customer due diligence on the customers of their respondent bank clients.
- The Basel Committee on Banking Supervision’s (BCBS’s) publication of a revised version of its guidance on correspondent banking.
- The hosting of a roundtable discussion amongst the FSB, International Monetary Fund, the World Bank, and officials from central banks, private banks and finance ministries around the world to discuss steps that need to be taken to address this issue.
The report also includes a discussion of deliverables for 2017, along with general time estimates as to when it expects to complete various tasks. Among other things, the FSB expects to publish the findings from its survey on correspondent banking in April of 2017, the BCBS expects to publish its revised guidance on correspondent banking in June, and FATF expects to release best practices on private sector information sharing and finalize its work on customer due diligence and financial inclusion in July.