Despite important progress in strengthening the resilience of the global financial system, some parts remain in a state of incomplete repair, said the Financial Stability Board (FSB) after its latest meeting assessing the risks facing global finance.
The Basel, Switzerland-based international body, which was established in 2009 as successor to the Financial Stability Forum, commented that some jurisdictions need to continue to improve the capitalisation of their banking systems, a fact illustrated in the UK as one example recently when the Prudential Regulation Authority (PRA) identified a capital shortfall of £27.1bn ($41.8 billion) in UK banks.
The balance sheet assessment to be undertaken by the European Central Bank (ECB) later this year in preparation for the single supervisory mechanism, together with clarity on the availability of adequate capital backstops, will be important to strengthening the eurozone banking system, added the FSB in its assessment.
In other parts of the world, such as Asia, where credit growth has been very rapid over recent years building further resilience remains a priority.
The FSB further noted that in recent weeks volatility in interest rates, asset prices and capital flows has increased on the back of the US Federal Reserve’s warning that its bond-buying and Quantitative Easing (QE) programme could end soon. Market participants and supervisory authorities should therefore incorporate in their stress tests scenarios considerably elevated interest rate risk, widening credit spreads, falls in asset prices, and material volatility in foreign exchange (FX) markets and capital flows as the QE money taps are slowly turned off - outside of Europe at least. Constrained capital levels in banks have been a contributory factor to reduced secondary bond market liquidity, potentially resulting in larger price movements in these markets in times of stress, added the FSB.
Global Systemically Important Insurers (G-SIIs) list on way
The FSB also reviewed the assessment methodology and policy measures for global systemically important insurers (G-SIIs), developed by the International Association of Insurance Supervisors (IAIS) taking into account the results of a public consultation. Based on this assessment methodology, the FSB and national authorities, in consultation with the IAIS, will identify an initial list of G-SIIs in July 2013. A decision on the G-SII status of - and appropriate risk mitigating measures for - major reinsurers will be made in July 2014.
The policy measures that will apply to G-SIIs include the recovery and resolution planning requirements under the FSB’s Key Attributes, enhanced group-wide supervision and higher loss absorbency requirements. As a foundation for higher loss absorbency requirements, the IAIS will as a first step develop straightforward, backstop capital requirements to apply to all group activities, including non-insurance subsidiaries, to be finalised by the time of the G20 Summit in 2014.
Over-the-counter (OTC) derivatives reforms
The FSB discussed progress in the implementation of reforms to OTC derivatives markets, with centralised clearing and increased transparency rules coming in. Given the highly international nature of these markets, members stressed the importance and urgency of resolving remaining issues arising from the cross-border application of rules, including bridging remaining differences between jurisdictions’ rules and implementation timetables, ahead of the G20 summit in early September.
The FSB agreed that global aggregation of trade repository data is essential to enable comprehensive monitoring of risks to financial stability, and launched a feasibility study of options for how information from trade repositories can be aggregated and shared among authorities. The results of the study will be published in H114.
The FSB said that it welcomed the progress made by the Basel Committee on Banking Supervision and the International Organisation of Securities Commissions (BCBS/IOSCO) in developing final international standards for margining requirements for non-centrally cleared derivatives trades and capital requirements relating to exposures to central counterparties. The FSB discussed an interim assessment of the macroeconomic impact of global OTC derivatives reforms and will publish a final version later this year.
The FSB will submit to the G20 Summit an update on jurisdictions’ progress to date in putting in place regulations and their committed timelines for completing remaining reforms.
The FSB is chaired by Mark Carney, who recently stepped down as governor of the Bank of Canada and will remain FSB chair in his new post as governor of the Bank of England (BoE), which begins on 1 July.