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    FSB Issues Reports on NBFI and Liquidity in Government Bonds

    November 14, 2022

    The Financial Stability Board (FSB) published a letter intended for the G20 leaders, highlighting the work that it will undertake under the Indian G20 Presidency in 2023 to strengthen resilience of the financial system. Recently published FSB also examine enhancing the resilience of non-bank financial intermediation (NBFI), financial policies in the wake of COVID-19, and liquidity in core government bond markets.

    The key highlights of the aforementioned updates follow:

    • Letter to G20. In its letter, FSB asked for the continued and reinforced support of G20 in strengthening the resilience of the financial system. FSB highlighted its work on monitoring of current vulnerabilities during the Indonesian G20 Presidency and further discussed the work that FSB will take forward under the Indian G20 Presidency in 2023, which includes the roadmap set out for enhancing cross-border payments, developing a comprehensive framework for the oversight of crypto-assets activities and markets, and addressing financial risks from climate change via the enhancements to disclosures, data, vulnerabilities assessment, and regulatory and supervisory policy.
    • Report on non-bank financial intermediation (NBFI). The report provides an overview of the FSB work program in this area, outlines progress over the past year, and sets out planned work to enhance the resilience of non-bank financial intermediation for 2023 and beyond. The report sets out policy proposals to address systemic risk in non-bank financial intermediation, focusing on those activities and types of entities (“key amplifiers”) that may particularly contribute to aggregate liquidity imbalances and the transmission and amplification of shocks. These proposals aim to reduce liquidity demand spikes, enhance the resilience of liquidity supply in stress, and enhance risk monitoring and the preparedness of authorities and market participants. FSB will assess whether repurposing existing policy tools is sufficient to address systemic risk in non-bank financial intermediation, including the need to develop additional tools for use by authorities rather than creating new ones. Going forward, FSB will develop additional metrics and tools to monitor non-bank financial intermediation vulnerabilities, enhance its analysis of non-bank financial intermediation vulnerabilities through targeted deep dives, and integrate findings from the work on the use of already available data (for example, in trade repositories) for monitoring systemic risk.
    • Report on liquidity in core government bond markets. As part of the work program to enhance resilience of non-bank financial intermediation, the report analyzes the liquidity, structure, and resilience of core government bond markets. The report provides information on recent changes in the structure and liquidity of core government bond markets, analyzes the changes in government bond market liquidity (and related repo and futures markets) during the March 2020 turmoil, examines the behavior of dealers and other market participants in these markets (including the drivers of that behavior), and identifies factors that promote the resilience of government bond markets. The report also outlines policies to consider for enhancing the resilience of core government bond markets; these policies include measures to mitigate unexpected and significant spikes in liquidity demand by non-bank investors, enhance the resilience of liquidity supply in stress, and enhance market oversight, risk monitoring, and preparedness of authorities and market participants.
    • Report on financial policies in the wake of COVID-19. The report discusses how the evolution of the pandemic, the Russian invasion of Ukraine, and the subsequent economic developments have affected the challenges financial authorities face as well as how these relate to the measures that were put in place in the context of the COVID-19 pandemic. The report considers specific policy challenges related to ensuring the effectiveness of domestic policies, containing cross-border spillovers and preventing scarring by addressing debt overhang issues, and the role of international standard. The report also considers exit strategies through the lens of financial stability and the capacity of the financial system to finance strong and equitable growth. Going forward, FSB will continue to support a strong and equitable global recovery through intensive monitoring of vulnerabilities and assessments of the resilience of the global financial system, regular exchange of information and experiences with prudential policy measures, and cooperation with the International Organization for Securities Commissions (IOSCO) and other standard- setters, to strengthen the resilience of non-bank financial intermediation.

     

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    Keywords: International, Banking, G20, Cross Border Payments, Systemic Risk, Covid 19, Financial Stability, Government Bonds, Non Bank Financial Intermediation, NBFI, Crypto Assets, FSB

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