FSB to Address Too-Big-to-Fail, Shadow Banking, and Fintech Risks
Randal K. Quarles, Vice Chair for Supervision of FED and Chair of FSB, spoke at a conference on financial intermediation, regulation, and economic policy, which was hosted by ECB and Journal of Money, Credit and Banking in Frankfurt. He shared his views on the way the work of FSB must evolve and outlined the core principles that, he believes, should inform that work. These core principles, according to Mr. Quarles, are engagement, rigor, and analysis. He also discussed the work priorities of FSB for 2019 and beyond, including non-bank financing, fintech, and evaluation of the too-big-to-fail reforms.
The first prominent issue on the FSB agenda in 2019 is fintech, said Mr. Quarles. FSB monitors and analyzes the financial stability implications of financial innovation as part of its mandate to identify and address vulnerabilities in the global financial system. Two areas that FSB has started to examine in greater detail include the potential effects from the entry of large technology firms into financial services and the potential effects from the growth in decentralized financial technologies. Both the potential entry of large, established technology companies into financial services and the ability of technology to decentralize financial transactions raise a number of issues, some of which may touch on financial stability. FSB will address the issues with discipline and analytical rigor in a way that incorporates the views of the public and key stakeholders and that results in answers that are practical and intelligible.
He then highlighted that the nonbank financial intermediation (or shadow banking) has been a source of systemic risk and that it has grown relatively rapidly since the global crisis, in both its absolute size and its relative importance in intermediating credit. Consequently, developments in this area need to be monitored closely. To this end, FSB produces an annual report that outlines the developments in non-bank financing, including global trends and potential risks. FSB promotes the resilience of non-banks through the development of a range of policies to address systemic vulnerabilities as they arise, while not impeding the growth of sustainable non-bank financing models. He then added that it is imperative to start analyzing the effectiveness of the policies that have been implemented.
Finally, Mr. Quarles discussed the past and upcoming work of FSB to address the issue of “too-big-to-fail.” To address this challenge, FSB and other global standard-setters developed a framework and a set of policy measures intended to reduce the moral hazard risks posed by systemically important financial institutions. He highlighted that the total loss-absorbing capacity (TLAC) standard is a key element of the policy measures of FSB to address too-big-to-fail. Under this standard, FSB has introduced a bail-in (in contrast to a bail-out) strategy that necessarily employs a gone concern or post-failure loss-absorbing and recapitalization capacity for the set of global systemically important banks or G-SIBs. To assess the effectiveness of these measures, he added that FSB is launching an evaluation of the effects of the too-big-to-fail reforms. FSB plans to draw extensively on academic advisers during all phases of the work in this area and encourages other experts in this field to look closely to the consultative document that will be coming from the study next year. FSB welcomes inputs as it undertakes the study of this signature issue from the crisis.
The FSB Chair concluded that "moving forward there will surely be additional issues to address and areas to examine." During his time as the FSB Chair, he hopes to make progress not only on the areas he has outlined but also on a range of additional forward-looking issues.
Keywords: International, Banking, Securities, Fintech, Too-big-to-fail, Systemic Risk, TLAC, G-SIB, Shadow Banking, 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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