FSB published a letter, from its Chair Randal K. Quarles, which sets out a number of focus areas for FSB to maintain financial stability during the COVID-19 pandemic. The letter emphasizes the importance of continuation of work to strengthen the global financial system, including evaluating financial post-crisis financial reforms, supporting a smooth transition away from LIBOR, and developing a roadmap to improve cross-border payments. FSB also released a report on the financial stability implications of, and policy measures taken in response to, the COVID-19 pandemic. The letter and the report have been delivered to the G20 Finance Ministers and Central Bank Governors, ahead of their virtual meeting on July 18, 2020.
In the letter, FSB Chair notes that the swift intervention of FSB members in response to COVID-19 pandemic has helped to stabilize markets, but the path of recovery is still uncertain. The letter sets out a number of focus areas for FSB during the COVID-19 pandemic:
- Assessing vulnerabilities during the current crisis. Volatility in markets has decreased but may well return. FSB has identified a number of priority areas that require further analysis, including risks related to liquidity stress, debt burden of non-financial corporates, and effects of credit rating downgrades. The FSB monitoring provides essential and near real-time input for policymakers to anticipate and address developing risks in the financial system.
- Reinforcing resilient non-bank financial intermediation. Understanding risk, risk transmission, and policy implications for the non-bank financial intermediation sector is more important than ever. By the G20 Summit this November, FSB will holistically review the market turmoil in March. Additionally, FSB has begun a mapping of the critical connections between the banking and non-banking sectors. This combined work will inform the future steps of FSB in 2021 under the Italian G20 Presidency to improve the resiliency of the non-bank financial intermediation sector while preserving its benefits.
- Identifying and assessing policy responses. The decisive immediate policy response has laid the ground for effectively containing the economic and financial fallout of the COVID-19 pandemic. FSB has been sharing information on policy responses and is identifying indicators to help assess the efficacy of policy actions. FSB will also help coordinate supervisory and regulatory actions, including to take account of cross-border spillovers and promote a level playing field.
- Monitoring consistency with standards. Reflecting its commitment to the agreed financial reforms, FSB has compiled, in cooperation with the standard-setting bodies, the COVID-19 actions taken by FSB members. This work evaluates the consistency of the member actions with agreed-upon financial reforms and the extent to which the actions have used the flexibility within international standards.
- Using flexibility in standards and buffer use. Most measures taken by FSB members have used the flexibility built into international standards, including regarding the use of capital and liquidity buffers. FSB supports the BCBS statement setting out that a measured draw-down of buffers is both expected and appropriate during the current period of stress.
The report to the G20 details COVID-related financial stability developments, policy measures taken, and work to assess the effectiveness of these measures. It draws on the significant FSB work undertaken to assess vulnerabilities, consider policy responses under different recovery scenarios, and note where additional work may be necessary. The report mentions that authorities’ experiences to date suggest common elements in the policy approach that may support the effectiveness of policies. These include:
- Ongoing monitoring and information collection to support effective crisis management, which depends on reliable and timely information in a rapidly evolving environment
- Use of stress tests and scenario analysis, to provide policymakers with an understanding of how a range of economic recovery scenarios may affect financial resilience
- A forward-looking supervisory approach in light of likely changing circumstances
- Clear communication of policy measures and supervisory approaches, not least regarding the usability of buffers to support lending and absorb losses
- Cross-border coordination to preserve consistency with international standards when using the in-built flexibility in their regulatory and supervisory frameworks
This report also consolidates the extraordinary policy measures taken across the national membership of FSB and the standard-setting bodies to address the financial fallout of the pandemic. FSB will provide a further update on member authorities’ and standard-setting bodies’ COVID-19 responses, its financial stability risk assessment, and its work on the effectiveness of policy responses by November 2020, ahead of the G20 Leaders’ Summit.
Keywords: International, Banking, Insurance, Securities, COVID-19, LIBOR, Liquidity Risk, Stress Testing, NBFI, Regulatory Capital, Cross-Border Spillovers, G20, FSB
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EIOPA published the financial stability report that provides detailed quantitative and qualitative assessment of the key risks identified for the insurance and occupational pensions sectors in the European Economic Area.
EBA published its risk dashboard for the first quarter of 2020 together with the results of the risk assessment questionnaire.
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PRA published the consultation paper CP11/20 that sets out its expectations and guidance related to auditors’ work on the matching adjustment under Solvency II.
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EBA issued a statement reminding financial institutions that the transition period between EU and UK will expire on December 31, 2020; this will end the possibility for the UK-based financial institutions to offer financial services to EU customers on a cross-border basis via passporting.
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