Richard Berner, Director of OFR, spoke about challenges in the area of globalization and financial stability policy, at the IMF 18th Jacques Polak Annual Research Conference on The Global Financial Cycle in Washington DC. He stated that improving collective understanding of factors affecting the resilience of the global financial system is essential for achieving the OFR mission. He highlighted that assessing threats to financial stability requires weighing vulnerabilities in the financial system against its resilience and assuring the resilience of the financial system globally requires cross-border cooperation.
While discussing the challenges to financial stability policy, Berner states, “... while markets and institutions are global, our policies, regulations, and laws are national in scope. This dichotomy has always constrained the architecture of the international monetary system and our efforts to ensure financial stability.” He also discussed financial globalization, ranging from the general to the specifics of central clearing counterparties. Cross-border linkages involved in both global and domestic systems for payments, clearing, and settlement are especially important. Financial reforms required central clearing of standardized over-the-counter, or OTC, derivatives in centrally cleared counterparties, or CCPs, and minimum margin standards. Central clearing through CCPs offers clear benefits for efficiency and risk management by making more efficient use of scarce collateral and pooling risk. He further explained that designing a financial stability policy framework must start with clear objectives, strong governance, and coherent institutional roles and responsibilities. Next, it requires an ongoing assessment and monitoring of potential threats. Supervisory stress testing, which assesses losses under potential future stress scenarios, combines aspects of both the micro-prudential and macro-prudential policy toolkits.
Mr. Berner also explained the challenges and consequences from fragmentation, also discussing the tools and policies that might help to compensate for these. Taking the example of Brexit, he noted, “The rules of the game for financial services in Europe have been defined by the EU’s single market, which has fostered cross-border liberalization. For Europe, such fragmentation runs counter to the aims of European Capital Union and the use of “market-based” finance to reduce the dependence on banks. If segmentation of clearing occurred, it could reduce the benefits of clearing, including of netting and risk diversification.” He further highlighted that these consequences need not occur if global policymakers use Brexit as an opportunity to agree on equivalent regulatory principles across borders as the basis for open markets. Leveling the global regulatory playing field to avoid cross-border regulatory arbitrage and fragmentation has long been a major post-crisis goal for international cooperation, especially since the passage of financial reforms.
He also emphasized the global need for high-quality, granular data, as data needed to inform financial stability analysis and policymaking must often be granular as is clear in the case of CCP risk assessment and resilience. Such data must also be standardized to assure their quality; to make them easier to compare, aggregate, and analyze; and to make them shed light on who owns what risks. Standards such as the Legal Entity Identifier enable precise identification of parties to financial transactions. Providing more and better data is important. Standardizing them and sharing them now, in financial calm times, across borders is equally so.
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