Featured Product

    FSB Studies Vulnerabilities Related to USD Funding in Emerging Markets

    April 26, 2022

    The Financial Stability Board (FSB) published a letter to the G20 Finance Ministers and Central Bank Governors that sets out financial stability issues arising from Russia’s invasion of Ukraine. It also published a report that examines external vulnerabilities in the emerging market economies associated with USD funding.

    The G20 letter discusses the current outlook for financial stability and sets out the FSB’s plans the coming months to assess and address emerging vulnerabilities such as high debt levels in the non-financial sector and stretched valuations. The letter lays out areas that warrant particular attention, including linkages between commodity markets and the rest of the financial system; financial system leverage and possible amplifiers in the event of market stress; and cyber risks. FSB is intensifying monitoring of the market developments and emerging vulnerabilities, with a focus on commodity markets, margining, and leverage to strengthen the non-bank financial intermediation (NBFI). FSB is developing a systemic approach to NBFI along with the policy proposals that are effective from a systemwide perspective. In October 2022, FSB will deliver a comprehensive progress report on various initiatives under the NBFI work program to the G20 Summit, including on the main findings of relevant FSB and standard-setting body initiatives and on policy proposals to address systemic risk in NBFI. The letter stresses the importance, and increased urgency, of the FSB’s ongoing policy work to address the financial risks from climate change; strengthen the resilience of non-bank financial intermediation; and regulate and supervise "unbacked" crypto-assets, stablecoins, and cyber risks. The letter also outlines the FSB work on analyzing the impact of the rapidly evolving Decentralized Finance (DeFi) on financial stability, to help to create the necessary conditions for safe innovation.

    The report presents findings of the FSB and International Monetary Fund’s (IMF) work on the interaction between USD funding and external vulnerabilities in emerging market economies, which also forms part of the FSB’s work program on non-bank financial intermediation. The report examines how external borrowing contributed to the build-up of vulnerabilities in emerging market economies and to the USD funding stress during the March 2020 turmoil as well as draws policy implications about measures to enhance emerging market economies resilience to lessen the impact of future episodes of stress. The report stresses the importance of ongoing work to address vulnerabilities from liquidity mismatches in open-ended funds, which would also help bolster the resilience of emerging market economies’ financial systems. IT also assesses the relevant policy measures taken in March 2020. Emerging market economies authorities deployed both standard crisis management tools and new measures to mitigate pressures in local currency bond markets and to stem capital outflows. Actions by advanced economy authorities were also important in mitigating strains in financial markets globally and addressing USD funding pressures. However, these actions did not directly address the underlying vulnerabilities in emerging market economies. The report encourages authorities to further consider closing data gaps to facilitate risk monitoring and the timely adoption of policies to mitigate external emerging market economies vulnerabilities; it also proposes a number of policy measures that seek to reduce emerging market economies vulnerabilities stemming from external funding and non-bank financing as well as to enhance crisis management tools. These include measures to:

    • limit the build-up of non-financial corporate foreign currency mismatches
    • further develop foreign currency hedging markets at the domestic and regional levels to manage currency risks
    • deepen local currency debt markets and foster a broader domestic investor base
    • tackle NBFIs’ vulnerabilities, including those relating to liquidity mismatches in open-ended funds

     

    Related Links


    Keywords: International, Banking, Securities, Basel, Financial Stability, Emerging Markets, Derivatives, Cyber Risk, ESG, Climate Change Risk, Non-Bank Financial Institutions, Crypto-Assets, Stablecoins, Cryptocurrencies, Decentralized Finance, Liquidity Risk, Hedging, IMF, FSB

    Featured Experts
    Related Articles
    News

    ESAs Issue Multiple Regulatory Updates for Financial Sector Entities

    The three European Supervisory Authorities (ESAs) issued a letter to inform about delay in the Sustainable Finance Disclosure Regulation (SFDR) mandate, along with a Call for Evidence on greenwashing practices.

    November 15, 2022 WebPage Regulatory News
    News

    ISSB Makes Announcements at COP27; IASB to Propose IFRS 9 Amendments

    The International Sustainability Standards Board (ISSB) of the IFRS Foundations made several announcements at COP27 and with respect to its work on the sustainability standards.

    November 10, 2022 WebPage Regulatory News
    News

    IOSCO Prioritizes Green Disclosures, Greenwashing, and Carbon Markets

    The International Organization for Securities Commissions (IOSCO), at COP27, outlined the regulatory priorities for sustainability disclosures, mitigation of greenwashing, and promotion of integrity in carbon markets.

    November 09, 2022 WebPage Regulatory News
    News

    EBA Finalizes Methodology for Stress Tests, Issues Other Updates

    The European Banking Authority (EBA) issued a statement in the context of COP27, clarified the operationalization of intermediate EU parent undertakings (IPUs) of third-country groups

    November 09, 2022 WebPage Regulatory News
    News

    OSFI Sets Out Work Priorities and Reporting Updates for Banks

    The Office of the Superintendent of Financial Institutions (OSFI) published an annual report on its activities, a report on forward-looking work.

    November 07, 2022 WebPage Regulatory News
    News

    APRA Finalizes Changes to Capital Framework, Issues Other Updates

    The Australian Prudential Regulation Authority (APRA) finalized amendments to the capital framework, announced a review of the prudential framework for groups.

    November 03, 2022 WebPage Regulatory News
    News

    BIS Hub and Central Banks Conduct CBDC and DeFI Pilots

    The Bank for International Settlements (BIS) Innovation Hubs and several central banks are working together on various central bank digital currency (CBDC) pilots.

    November 03, 2022 WebPage Regulatory News
    News

    ECB Sets Deadline for Banks to Meet Its Climate Risk Expectations

    The European Central Bank (ECB) published the results of its thematic review, which shows that banks are still far from adequately managing climate and environmental risks.

    November 02, 2022 WebPage Regulatory News
    News

    ESAs, ECB, & EC Issue Multiple Regulatory Updates for Financial Sector

    Among its recent publications, the European Banking Authority (EBA) published the final standards and guidelines on interest rate risk arising from non-trading book activities (IRRBB)

    October 31, 2022 WebPage Regulatory News
    News

    EC Adopts Final Rules Under CRR, BRRD, and Crowdfunding Regulation

    The European Commission (EC) recently adopted regulations with respect to the calculation of own funds requirements for market risk, the prudential treatment of global systemically important institutions (G-SIIs)

    October 26, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8582