The Financial Stability Board (FSB) issued a letter from its Chair, Randal K Quarles, to the G20 Leaders, ahead of their Summit in Rome. The letter notes that the Rome Summit is taking place amid signs of the global economy recovering from the impact of COVID-19 and related containment measures. It also notes that the global financial system is facing significant structural challenges, which include rapid technological innovations within the traditional financial sector as well as outside, such as in the form of various crypto-assets. The letter also discusses the increasing focus on potential risks to financial stability from climate change. Accompanying the Chair’s letter to the G20 Leaders is a report on the lessons learned from COVID-19 from a financial stability perspective.
The report updates the assessment provided in the July interim report and outlines actions by FSB and other standard-setting bodies in response to those lessons. The key lessons and actions are related to the following:
Market and institutional resilience. The functioning of bank capital and liquidity buffers may warrant further attention, the Basel Committee on Banking Supervision (BCBS) will update its overall analysis on the lessons from the pandemic. The March 2020 market turmoil underscored the need to strengthen resilience in the non-bank financial intermediation sector; FSB is taking forward a comprehensive work program. Some concerns about possible excessive procyclicality in the financial system remain, standard-setters will take forward work in procyclicality in margining practices and BCBS will further monitor expected credit loss provisioning.
Operational resilience. COVID-19 has highlighted the importance of effective operational risk management being in place before a shock hits. FSB will develop best practices for the types of information authorities may require related to cyber incidents to promote financial stability. FSB is also launching further work related to third-party risk management and outsourcing, and will develop expectations for financial authorities’ use in oversight of financial institutions’ reliance on critical service providers.
Crisis preparedness. The pandemic highlighted the importance of effective cross-border cooperation, coordination and risk-sharing. FSB will identify a set of good practices and emerging practices of crisis management groups to enhance preparedness for, and facilitate the management and resolution of, a cross-border financial crisis affecting a global systemically important bank (G-SIB).
The report also highlights broader policy issues that warrant further attention. These include monitoring winding down of the COVID-19 policy responses to identify systemic vulnerabilities early on; addressing debt overhang in the non-financial corporate sector; promoting resilience amid rapid technological change; completing the remaining elements of post-2008 crisis reform agenda; and examining, in due course, how macro-prudential policy has functioned during the pandemic and in its aftermath.
Keywords: International, Banking, Securities, COVID-19, Operational Resilience, Regulatory Capital, NBFI, Expected Credit Loss, Cyber Risk, BCBS, FSB
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