The Financial Stability Board (FSB) published a report that assesses progress on the transition from the Interbank Offered Rates, or IBORs, to overnight risk-free rates as well as a report that assesses global trends in the non-bank financial intermediation (NBFI) sector.
The report on LIBOR transition highlights that the transition from LIBOR to overnight risk-free rates and efforts made to improve the robustness of interest rate benchmarks have increased market stability and integrity. Most LIBOR settings have now ceased and, while certain panel-based USD settings are continuing until end-June 2023, to support the transition of legacy contracts, the market has already shifted new activity away from LIBOR and toward risk-free rates. While significant progress has been made, especially among FSB jurisdictions where exposure to LIBOR is the highest, the report notes that there may be some residual risk arising from relatively low awareness of transition among users of USD LIBOR in jurisdictions where LIBOR exposure is low. The report calls for market participants to take active steps to address existing legacy contracts in preparation for the end of the remaining panel-based USD LIBOR settings and for the winding down of temporary synthetic LIBOR rates. The report also notes that authorities have been coordinating closely with each other to ensure that approaches to provide targeted solutions for legacy contracts complement one another. Looking ahead, it is essential that the financial system is anchored in robust reference rates that are underpinned by deep and liquid markets.
The report on non-bank financial intermediation notes that the NBFI sector linkages with the banking sector have continued to decrease since 2013. This was the case both in terms of funding and exposures. The other financial intermediaries’ sector—a subset of the overall NBFI sector that excludes insurance corporations, pension funds, and financial auxiliaries)—had the largest cross-border linkages across all financial sectors, as in previous years. The NBFI sector overall continued to be a net provider of cash in the repo market and its net level of repo assets rebounded strongly in 2021. The report also notes that global economic and financial conditions have deteriorated significantly since the beginning of 2022, with knock-on effects on the NBFI sector. While most of the analysis in this report is based on data through the end of 2021, economic and financial conditions have changed markedly since then. In 2022, slowing global growth, the war in Ukraine, commodities' price pressures, supply-chain disruptions, higher-than-expected inflation, and rising interest rates have provided a testing environment for the financial system including the NBFI sector and particularly its narrow measure. As part of its work program to enhance the resilience of the NBFI sector, FSB has identified key amplifiers of liquidity stress in the sector and will continue to develop metrics and tools to monitor associated vulnerabilities. These developments and experiences may shape future iterations of the annual monitoring exercise.
Keywords: International, Banking, Securities, Insurance, Non Bank Financial Intermediation, NBFI, Systemic Risk, Interest Rate Risk, Risk Free Rates, Interest Rate Benchmarks, Benchmark Reforms, Basel, Lending, FSB
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
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