Vulnerabilities affecting the financial system and major initiatives to strengthen the resiliency of the financial system- FSB

April 05, 2011: The Financial Stability Board (FSB) assessed vulnerabilities affecting the financial system, and made decisions needed to progress major initiatives to strengthen the resiliency of the financial system. The meeting also progressed work on a framework to establish Regional Consultative Groups to broaden the range of countries involved in the FSB’s work.

Vulnerabilities in the financial system

The ongoing international programme of financial reforms is strengthening the robustness of the global financial system. However pockets of weakness in the banking system remain, and sovereign and banking risks are closely intertwined in some countries. Members noted the risks of sudden changes in funding conditions, credit losses and yield curves, and stressed the importance of credible fiscal consolidation programmes to lower financial system risks. The FSB emphasised the need to decisively press ahead with the repair and strengthening of weak banking systems, using the forthcoming rounds of stress tests to address expeditiously any weak points identified.

There are signs that the low interest rate environment, which has been necessary to support growth and financial sector recovery, may be leading investors to search for yield in more complex non-standard market segments that increase exposure to liquidity risks. Developments in exchange-traded funds, commodities and high-yield markets are examples that warrant closer surveillance by regulatory authorities.

In a number of emerging markets economies, rapid credit growth and portfolio inflows have raised the risks of asset price inflation and other financial imbalances. The FSB discussed macroprudential measures taken in a number of countries to reduce resulting financial system vulnerabilities.

Key financial regulatory reforms

Addressing systemically important financial institutions (SIFIs). The FSB discussed progress in work to identify global SIFIs (G-SIFIs) and approaches to assessing the added loss absorbency that such institutions should meet. It also discussed progress in work to enable the orderly resolution of such financial institutions. It agreed an accelerated timetable and processes, including public consultation, to deliver the G-SIFI recommendations to the G20 Summit in November.

Reforming OTC derivatives markets. The FSB reviewed progress in the implementation of the recommendations set out in its October report covering standardisation, central clearing, exchange or electronic platform trading, and reporting to trade repositories. The FSB emphasises that all jurisdictions need to take immediate, concrete steps to ensure that the G-20 commitments can be implemented in an internationally consistent manner by the agreed end-2012 date. They noted the risk that the emergence of different models of trade repositories may lead to difficulties in cross-border sharing of data or aggregating data on a global basis unless steps are taken to ensure consistency.

The FSB welcomed the publication of the CPSS-IOSCO consultative report on harmonised principles for financial market infrastructures, covering payment systems, central securities depositories, securities settlement systems, and central counterparties (CCPs), and including guidance on trade repositories. Members also supported the conclusions of the Forum on CCP Access hosted by the CGFS, CPSS, and IOSCO in January 2011, which encourage derivatives CCPs to develop solutions to expand access to a broader set of participants, and to consider ways to develop links between CCPs, without sacrificing the rigour of CCP risk controls. Members welcomed the IOSCO report on trading of OTC derivatives on exchanges or organised trading platforms, and requested further analysis on the current market use of multi- or single-dealer platforms.


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