Wednesday, 15 April 2020

FSB addresses financial stability and COVID-19

By Amy Leisinger, J.D.

The Financial Stability Board has published a report that it delivered to the G20 on international cooperation and coordination to address the potential effects of COVID-19 on global financial stability. The financial system faces a challenge in sustaining credit flow while battling declining growth and managing risks, according to the FSB. Among other things, the board is monitoring the ability of financial institutions and markets to move funds to the real economy and the ability of financial intermediaries to manage liquidity risk, the organization noted.

FSB response. In a letter, FSB Chair Randal Quarles noted the two challenges that the global financial system must respond to in the face of COVID-19: (1) an increased need for credit around the world; and (2) uncertainty regarding the value of assets, which complicates market operations. The FSB is assessing vulnerabilities in the financial system and is considering the ability of the financial system to finance businesses and meet liquidity demands while managing counterparty risks, according to the organization. The FSB is also engaged in policy work to support a strong recovery after the pandemic, the letter explained.

Global cooperation. In its report, the FSB set out principles that support the response to help the real economy, maintain financial stability, and minimize the risk of market fragmentation. According to the report, the organization is sharing information on evolving financial stability threats and the measures that financial authorities are considering to address these issues. The FSB also is assessing potential vulnerabilities in individual jurisdictions around the world, and its members are coordinating their responses to provide flexibility and/or reduce operational burdens.

“The pandemic constitutes an unprecedented global macro-economic shock, pushing the global economy into a recession of uncertain magnitude and duration,” the FSB noted.

According to the FSB, providers of funding are increasingly preferring short-term safe assets, and credit risks are rising. As such, demands on capital and liquidity are growing, but operational risks are adding to potential vulnerabilities. Downward revisions of growth expectations and heightened risk aversion, coupled with high uncertainty regarding the magnitude and duration of the pandemic, have led to volatility in equity, the FSB explained.

The organization stated that the most critical issues include the ability: (1) to channel funds to the real economy; (2) to ensure that market participants can obtain U.S. dollar funding; (3) to effectively manage liquidity risk; and (4) to manage counterparty risks.

Authorities will continue share information to assess financial stability risks from COVID-19 to maximize the potential benefits of a global response, as well as to support market functioning and to accommodate robust business continuity planning, according to the FSB. Jurisdictions around the world also will work to delay implementation deadlines, provide flexibility, and reprioritize initiatives to support the financial system, the organization said. To address concerns, jurisdictions around the world have taken steps to provide macroprudential support, and central banks are working to provide liquidity to banks and markets. For example, the Federal Reserve has established facilities to provide liquidity and support credit needs, and the Basel Committee on Banking Supervision extended by one year the implementation of outstanding standards.

“The financial system is more resilient and better placed to sustain financing to the real economy as a result of the G20 regulatory reforms in the aftermath of the financial crisis,” the FSB noted. “However, financial intermediaries and markets face growing challenges in lending and funding,” the organization stated.

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