FSB Addresses G20 on COVID Measures, TBTF Reforms, and Climate Risks
FSB published a letter, from its Chair Randal K. Quarles, to the G20 Finance Ministers and Central Bank Governors, ahead of their virtual meeting on April 07, 2021. The letter discusses the optimal approach for withdrawal of COVID-19 support measures, the significant progress made on too-big-to-fail (or TBTF) reforms for banks, and the importance of addressing issues related to climate change. FSB also published a report that considers the extension, amendment, and expiration of the COVID-19 support measures through the lens of financial stability and the capacity of the financial system to finance growth.
The report on COVID support measures discusses the extent to which these measures have been unwound so far and the matters to which policymakers should have regard when considering whether to extend, amend, or end their economic and financial support measures. The report is intended to assist G20 members and other policymakers by providing a benchmark and drawing attention to the practices in FSB member jurisdictions. The report notes that, as public support is phased out, the ability of banks and non-bank financial institutions to bear risks and provide financing will be critical, not least because many viable but highly indebted firms will need to deleverage and boost their equity. Banks need to monitor the financial health of their borrowers, as support measures such as debt moratoria are extended, and to provision appropriately for impaired loans. Supervisors need to continue to find the right balance of flexibility and sound credit risk management. However, further work is needed to understand the risk of harmful cross-border and cross-sector spillovers, including possible feedback loops, and options to mitigate the risk. Simulations and stress testing are also proving to be useful analytical tools.
In the letter to G20 leaders, the FSB Chair notes that an evaluation of the too-big-to-fail reforms for banks points to a significant progress in this area and that these reforms reduced systemic risks, enhanced the credibility of resolution and market discipline, and ultimately produced net benefits to society. The evaluation also identified areas in which to-big-to-fail reforms can be further developed and these areas include implementation of Total Loss Absorbing Capacity (TLAC) and transparency of resolution funding mechanisms. The letter states, that, with respect to addressing issues related to climate change, three climate-related workstreams are underway at FSB, covering data, disclosures, and regulatory and supervisory practices. In July, FSB will provide the G20 with two reports, on ways to promote consistent, high-quality climate disclosures in line with the recommendations of the Task Force for Climate-related Financial Disclosures and on the data necessary for the assessment of financial stability risks and related data gaps. This summer, FSB will also present to G20 a coordinated, forward-looking roadmap to address climate-related financial risks and to promote rapid progress among jurisdictions. To enable better coordination, FSB invited NGFS to participate in FSB climate-related work and FSB plans to apply for observer status in the NGFS.
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Keywords: International, Banking, COVID-19, TCFD, Credit Risk, G20, Too Big to Fail, NGFS, Roadmap, Disclosures, Sustainable Finance, Climate Change Risk, TLAC, FSB
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