The emphasis is on the full and consistent implementation of past G20 agreements although, as we have seen, in areas such as OTC derivatives and resolution, “full and consistent” implementation remains a big challenge.
In addition, the FSB letter introduced two new issues.
First, the systemic implications of financial technology innovations, and risks from operational disruptions. The FSB will publish a high-level paper on this in April, with planned next steps.
It is clearly important to assess whether financial innovations in major trading/clearing/settlement/payment systems pose systemic risks. The FSB speech about managing risks without stifling innovation – although this may be easier said than done, and will depend on the risk appetite and analysis around the different jurisdictions.
Second, the FSB expressed concerns about whether banks need to adjust their business models to the lower growth/lower nominal interest rate environment and the enhanced regulatory framework.
They make no comment, however, on how the authorities should respond to banks that fail to make a successful adjustment to a new viable and sustainable business model. The ECB has expressed the same concerns; we will see how they deliver on this over the coming months.
Progress reports will be published ahead of the Hangzhou Summit in September on market-based finance; asset management activities; conduct – including the role of incentives in preventing misconduct, and addressing issues in fixed income, currency and commodity markets; correspondent banking; climate change; central counterparty resilience, recovery and resolvability; and experiences on macro-prudential policy frameworks and tools.
The analysis and assessment of any structural vulnerabilities associated with asset management activities will cover liquidity mismatch and leverage in funds; operational risks in transferring investment mandates; and securities lending. The FSB will consult on its assessment of these vulnerabilities and the policy recommendations to address them. It will also work with IOSCO to finalize the G-SIFI assessment methodology for asset management.
Finally, the FSB repeats the mantra that “there is no Basel 4”, and that the Basel Committee is not aiming to increase significantly capital requirements in completing its work to address excessive variability in risk-weighted assets.
This sounds enticing. However, the revised market risk framework finalized in January will increase market risk capital charges by at least 40 percent; the removal of the AMA option for measuring operational risk will increase capital requirements for banks currently using that approach; and the credit risk revisions and capital floor being consulted upon also seem likely to increase overall capital requirements. If there is to be no overall increase in capital requirements, it will be intriguing to see where capital relief will come from.