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FSB assesses financial vulnerability

FSB assesses financial vulnerabilities

The Financial Stability Board (FSB) has undertaken a mid-year discussion of risks and vulnerabilities and taken stock of its work against its plan for 2018.

Six items are of interest in terms of their potential impact on the regulation or supervision of financial institutions.

Interest rate adjustment

The FSB continues to view a sharp rise in interest rates (what the FSB calls a “broad-based snap-back in interest rates”) as a significant risk, for which financial institutions may not be sufficiently prepared. The FSB focused in particular on (a) the potential losses and defaults on high levels of sovereign, corporate and household debt in many parts of the world; and (b) swings in cross-border capital flows, which could spill over to local equity, bond and foreign exchange markets.

Asset management

The FSB has undertaken (but not yet published) a systemic stress assessment of the potential impact of portfolio rebalancing behaviours by asset managers and institutional investors on liquidity in fixed-income markets. While fixed-income liquidity may appear resilient under normal market conditions, correlated portfolio rebalancing away from higher-yielding fixed-income assets could in some circumstances amplify market stress during a market shock.

Crypto-assets

Although the FSB does not view crypto-assets as currently posing a risk to global financial stability, they do raise issues around consumer and investor protection, and their use to shield illicit activity, money laundering and terrorist financing.

The FSB notes that in addition to its own monitoring of potential emerging financial stability risks of crypto-assets, the Basel Committee, the Committee on Payments and Market Infrastructures, and IOSCO are considering other aspects of crypto-assets, including monitoring bank exposures, applications of the underlying technologies and use in payments, and the impact of initial coin offerings and crypto-asset exchanges on investor and consumer protection.

The FSB will publish a summary of these various work streams on crypto-assets ahead of the July meeting of G20 Finance Ministers and Central Bank Governors.

Cyber resilience

The FSB will publish in July a consultation paper on the common cyber lexicon the FSB has developed. 

Evaluation of the effects of regulatory reforms

The FSB is currently evaluating the effects of regulatory reforms on the financing of infrastructure investment and on the incentives to centrally clear over-the-counter derivatives. This may lead to some adjustments to the regulatory regime.

The FSB is launching two further evaluations, on the financing of small and medium-sized enterprises, and on the effects of policies to address too-big-to-fail.

Climate-related Financial Disclosures

The FSB Task Force will publish its monitoring report in September.

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