By John Filar Atwood
The Financial Stability Board (FSB) has determined that the main financial reforms called for by the G20 after the financial crisis are in place, but that implementation remains uneven. In its fourth annual report, prepared for the upcoming G20 summit in Buenos Aires, the FSB asks for the support of G20 leaders in implementing the reforms and reinforcing global regulatory cooperation.
Ten years after the crisis, reforms are in place that make the financial system more resilient, and reduce the likelihood and severity of future crises, according to the FSB. Large banks are better capitalized, less leveraged, and more liquid, the report states, and implementation of too-big-to-fail reforms is advancing. In addition, over-the-counter (OTC) derivatives markets are simpler and more transparent, the use of central clearing has increased, and collateralization is more widespread, the FSB said.
Implementation efforts. The FSB said that it is now turning its attention toward implementation of the G20 reforms, which remains incomplete. This will include work to implement the final Basel III reforms and to operationalize resolution plans for cross-border banks, the FSB stated. It also entails building effective resolution regimes for insurers and central counterparties and making OTC derivatives trade reporting more effective. The report notes that the FSB also hopes to strengthen the oversight and regulation of non-bank financial intermediation.
The FSB has begun to evaluate the impact of G20 reforms on infrastructure finance and incentives to centrally clear OTC derivatives. The evaluation framework is working as intended, according to the FSB, and is identifying and delivering adjustments where appropriate, without compromising financial resilience.
The report acknowledges that the global financial system has continued to grow, but there are no signs that the reforms have led to a shortage in the supply of financing. In addition, the supply of financial services has become more diversified, including through the growth in non-bank financial intermediation, the report states. Overall, the trend toward greater global financial integration has continued, with some divergent trends within market segments, the FSB said.
Next steps. Looking ahead, the FSB determined that although the financial system is stronger, risks keep evolving and financial institutions and markets may not be sufficiently prepared for potential risks from adverse market developments. In the FSB’s opinion, high sovereign and corporate debt levels in many parts of the world could expose the financial system to significant risk. Sharply rising yields could trigger swings in cross-border capital flows, which could impact local equity, bond, and foreign exchange markets, the FSB said. Moreover, the increasing role of investment funds could amplify any market shocks, the report states.
The FSB advised that it will continue to assess the resilience of evolving market structures and the impact of technological innovation. This includes the resilience of financial markets in stress, and the growth of non-bank financial intermediation and cyber risks, the FSB said.
In the report, the FSB recommends that the world’s regulators lead by example in promoting the timely implementation of remaining reforms to Basel III, resolution regimes, OTC derivatives, and non-bank financial intermediation. Frameworks for cross-border regulatory cooperation should allow for the sharing of information and support an open and integrated global financial system, in the FSB’s view.
The FSB called on regulators to evaluate whether the G20 reforms are achieving their intended outcomes, to identify any material unintended consequences, and to address them without compromising the objectives of the reforms. The FSB also asked financial stability authorities to continue to contribute to the FSB’s monitoring of emerging risks, and to be ready to act if the risks materialize.