Financial System Still Vulnerable in Recovery: FSB Chair

Source: Regulation Asia Manesh Samtani, Regulation Asia 2020-07-16

Funding markets remain at risk of liquidity stress, volatility in markets may return, and assets are at risk of a “sudden and sharp” repricing.

FSB (Financial Stability Board) chair Randal Quarles has written to the G20 outlining the challenges that still lay ahead along the path to recovery from Covid-19.

Among these challenges are solvency concerns for corporate borrowers, who entered the crisis with already-high levels of debt and necessarily borrowed more to navigate the crisis.

In addition, funding markets will remain at risk of liquidity stress, volatility in markets may return, and a “sudden and sharp” repricing of assets may occur as a result of an ongoing pricing disconnect between markets and economic fundamentals.

“We cannot be complacent,” Quarles said. “The crisis is far from over and we must not lose sight of the hard work we must do together to support global recovery.”

In a report delivered to the G20 on the financial stability implications of Covid-19 and the policy measures taken, the FSB sets out the areas where further work is necessary to address the financial fallout of the pandemic.

The FSB has identified a number of priority areas that require further analysis to assess vulnerabilities, including risks related to liquidity stress, the debt burden of non-financial corporates, and the effects of credit rating downgrades.

Work is also underway to reinforce the resilience non-bank financial intermediation, which the FSB says is vulnerable due to liquidity mismatches, leverage and interconnectedness.

Meanwhile, the FSB has been sharing information on policy responses and their relationship to potential paths for economic recovery, with a view to identifying indicators to assess policymaking efficacy.

“As this work continues and information sharing deepens, FSB members will be better prepared to act and to adjust according to the course of economic recovery,” Quarles says in his letter.

Meanwhile, the FSB will continue to monitor the consistency of the member actions with agreed-upon financial reforms, evaluate whether regulatory reforms are working as intended, support a smooth transition away from LIBOR, and develop a roadmap to improve cross-border payments.

The Quarles letter is available here and the corresponding report here.

The G20 Finance Ministers and Central Bank Governors will meet virtually on Saturday (18 July).

The Financial Stability Board(FSB)

Randal Quarles

Financial System Still Vulnerable in Recovery: FSB Chair

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