Financial Stability Board notes signs of improvement in the global macroeconomic outlook

June 27, 2009: The Financial Stability Board (FSB) held its inaugural meeting in Basel on 26-27 June. This was the first meeting since the Financial Stability Forum (FSF) was re-established as the FSB with an expanded membership and a broader mandate to promote financial stability.

The FSB’s mandate is to assess vulnerabilities affecting the financial system; identify and oversee action needed to address them; promote coordination and information exchange among authorities responsible for financial stability; monitor and advise on market developments and their implications for regulatory policy; advise on and monitor best practice in meeting regulatory standards; undertake joint strategic reviews of the policy development work of the international standards setting bodies; set guidelines for and support the establishment of supervisory colleges; manage contingency planning for cross-border crisis management; and collaborate with the International Monetary Fund (IMF) to conduct Early Warning Exercises.

The FSB set up the internal structures needed to fulfill this mandate. It also discussed risks and challenges facing financial systems and progress in implementing prior FSF/FSB and G20 recommendations.

Institutional structures of the FSB

The new structures of the FSB include, in addition to the FSB Plenary, 1 a Steering Committee and three Standing Committees – for Vulnerabilities Assessment; Supervisory and Regulatory Cooperation; and Standards Implementation.

The Steering Committee will be chaired by the FSB Chair and will provide operational guidance between Plenary meetings to carry forward the directions of the FSB.

The Standing Committee for Vulnerabilities Assessment will assess and monitor vulnerabilities in the financial system and propose to the FSB actions needed to address them. Its findings will be the basis for the FSB’s vulnerabilities deliberations, and will provide input for the Early Warning Exercises. It will be chaired by Jaime Caruana, General Manager of the Bank for International Settlements.

The Standing Committee for Supervisory and Regulatory Cooperation will address coordination issues that arise among supervisors and regulators, and will raise any need for policy development that arises in this regard. It will set guidelines for and oversee the establishment and effective functioning of supervisory colleges, and will monitor and advise on best practice in meeting regulatory standards with a view to ensure consistency, cooperation and a level playing field across jurisdictions. It will maintain a link with work on contingency planning for cross-border crisis management at major financial institutions and advise on crisis management issues more broadly. Adair Turner, Chairman of the UK Financial Services Authority, will chair the Committee.

The Standing Committee for Standards Implementation will prepare the FSB’s planned peer reviews of its members, which are an obligation of membership; and will report on members’ commitments and progress in implementing international financial standards and other initiatives. More broadly, the Committee will propose a framework and discuss progress in strengthening adherence to prudential regulatory and supervisory standards by relevant jurisdictions. Tiff Macklem, Associate Deputy Minister of the Department of Finance of Canada, will chair this Committee.

To take forward earlier FSF work on cross-border crisis management, the FSB also established a Cross-border Crisis Management Working Group under the Standing Committee for Supervisory and Regulatory Cooperation. The Working Group, chaired by Paul Tucker, Deputy Governor of the Bank of England, will work to provide a framework to implement the FSF Principles for Cross-border Cooperation on Crisis Management.

Financial system risks and responses

The FSB noted signs of improvement in the global macroeconomic outlook and in somefinancial markets, especially funding markets. Banks have raised capital from the private sector, but the process of restructuring and strengthening bank balance sheets is not yet completed. Corporate bond markets continue to see strong primary issuance, but other credit channels, including bank lending and securitisation, will need to be strengthened in order to support a sustained recovery. It will thus be important for authorities to follow through in implementing policies to resolve problems in financial systems and strengthen systemic resilience, so that the recent positive signs can be translated into sustainable growth.

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