The COVID-19 pandemic is one of the largest challenges that the financial system has faced since the 2008 global financial crisis. The Financial Stability Board (FSB) circulated a report to the G20 Finance Ministers and Central Bank Governors prior to a virtual meeting which took place last Wednesday 15thApril, which highlights number of key measures taken by the global community and the FSB itself to address the current challenges.
Some of the most prominent messages detailed throughout the report is how the financial markets will sustain the flow of credit amidst the slowing growth, and how to address other vulnerabilities in the financial ecosystem. The FSB is closely monitoring key nodes in the financial markets, including “the ability of financial institutions and markets to channel funds to the real economy; the ability of market participants around the world to obtain US dollar funding, particularly in emerging markets; the ability of financial intermediaries, such as investment funds, to effectively manage liquidity risk; and the ability of market participants and financial market infrastructures (including CCPs) to manage evolving counterparty risks.”
The report highlights five major principles that the official community has aligned to in order to coordinate the response to support the real economy, maintain financial stability and minimize market fragmentation. These can be summarized as follows:
- Monitor and information sharing:Monitoring between the FSB and standard-setting bodies (SSB) on both an individual and collective manner;
- Maintain real economy with existing financial standards:Authorities to make use of current firm-specific and macroprudential buffers to ensure the supply of finance is maintained in the real economy;
- Temporary flexibility for firms and authorities:The FSB, SSBs and authorities will provide flexibility in technical compliance rules and reduce operational burdens for firms and authorities to ensure they can focus on their COVID-19 response;
- International standards maintained:Authorities will maintain international standards and underlying objectives of existing international standards will not be compromised;
- Coordinated unwinding of temporary measures post-pandemic:Authorities will coordinate with the FSB and SSBs the winddown process and assist in returning the financial conditions and firms’ operations to normal following the pandemic.
The FSB has stated that following the G20 regulatory reforms, the global financial markets are more resilient and better prepared for these shocks. They have subsequently responded to the internationally coordinated principles above in three defined ways. The FSB is openly sharing key information with authorities and necessary bodies on financial stability risks, policy measures and the effects of policies on authorities. Secondly, potential vulnerabilities in the financial ecosystem amongst key nodes are being constantly assessed to understand how the pandemic is impacting them. Lastly, FSB members are coordinating responses to policy issues, including measures that SSBs and authorities take to provide flexibility to international standards or to reduce the burden of operation
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