While speaking at an IMF-IIF (Institute of International Finance) meeting in Washington DC, the DNB President and FSB Vice Chair Klaas Knot discussed the future agenda for financial sector reforms, financial stability, and regulatory developments for the financial industry. After taking stock of the state of the international financial sector, Mr. Knot outlined the key technological changes that will shape the financial sector and the regulatory and supervisory priorities of FSB.
Mr. Knot discussed important challenges to the current financial system in the from of Brexit and technological innovation in the form of fintech. He also highlighted that, through their direct and indirect exposures, financial institutions, including banks, face potential technological and policy shocks as a result of climate change. This is evident from the results of the climate stress test that the Dutch central bank conducted last year. While examining the challenges posed by fintech, he mentioned that such developments could lead to new operational risks, including the growing adoption of cloud services, which could lead to concentration and systemic risks. He added that technological innovation is leading to changes in the structure of the value chain of banking services, pressuring the existing business models. He then outlined various scenarios that can develop in this context namely integration of banks with fintech firms, new types of cooperation and partnerships between these firms, and increased competition as bigtechs might pose challenge to the existing banks. FSB carefully monitors and analyzes the effects of these technological developments, said Mr. Knot.
Next, the FSB Vice Chair examined regulatory implications of the growing role of the non-bank financial intermediaries in the financial system, highlighting that there are unanswered questions about potential systemic risks originating from the unregulated sector. "This may lead to a mispricing of risks, or new interconnections within the financial system. These structural trends will shape the financial landscape and the business model of banks," said Mr. Knot. Finally, he highlighted the following priorities that will determine the reform agenda for the financial sector over the coming years:
- FSB will continue focus on effective implementation of the post-crisis G20 reforms. This includes efforts to minimize specific national elements that would undermine the level playing field and international harmonization.
- FSB will further enhance its role in risk identification. The Standing Committee on Assessment of Vulnerabilities will strengthen its surveillance framework to facilitate a structured and in-depth monitoring of potential risks to the global financial system. FSB will continue monitoring non-bank financial intermediation, which would benefit from enhanced data collection, improved risk analysis, and identifying appropriate policy measures.
- FSB will continue its work on the evaluation of reforms, after policy measures have been given a reasonable amount of time to take effect. Policymakers can assess whether the reforms have achieved their intended goals and whether there are any unintended consequences. FSB is evaluating the impact of the reforms on small and medium enterprise (SME) financing, to determine whether the enhanced capital regulation has affected lending to SMEs. FSB also recently started an evaluation of the policies to address the too-big-to-fail banks. This evaluation will look at the effects of higher risk buffers, intensified supervision, and the resolution framework to reduce the potential failure of systemic banks and enable an orderly resolution when necessary.
- FSB will strengthen its outreach to non-member jurisdictions and strengthen its communication and transparency toward external stakeholders. Strengthening the consultation process and improving information-sharing would contribute to stronger stakeholder involvement, thus improving the work and understanding of international reforms.
Related Link: Speech
Keywords: International, Banking, Insurance, Securities, Fintech, Financial Stability, Bigtech, FSB Priorities, DNB, FSB, BIS
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BoE published a scenario against which it will be stress testing banks in 2021, in addition to setting out the key elements of the 2021 stress test, guidance on the 2021 stress test, and the variable paths for the 2021 stress test.
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Bundesbank published Version 5.0 of the derivation rules for completeness check at the form level, with respect to the data quality of the European harmonized reporting system.
FED finalized a rule that updates capital planning requirements to reflect the new framework from 2019 that sorts large banks into categories, with requirements that are tailored to the risks of each category.
ECB published results of the quarterly lending survey conducted on 143 banks in the euro area.
ESAs published the final draft implementing technical standards on reporting of intra-group transactions and risk concentration of financial conglomerates subject to the supplementary supervision in EU.