The Financial Stability Board (FSB) today published two letters from its Chair, Klaas Knot, to G20 Leaders ahead of their Summit in New Delhi on 9-10 September, noting the following key points:

• FSB Chair warns that the higher interest rates that have been necessary to address inflation, alongside a slowing growth outlook, could impair the capacity of borrowers to service historically high levels of debt.
• Work to address financial stability risks associated with leverage in the non-bank financial intermediation (NBFI) sector will be a major focus of FSB policy work in 2024.
• A separate letter calls for continued support from Leaders as work to enhance cross-border payments shifts towards implementing practical projects in partnership with the private sector.

The first letter outlines the work the FSB has undertaken under the Leadership of India’s G20 Presidency to address existing vulnerabilities in the financial system and enhance the resilience of the financial system to structural change.

The letter notes the challenging backdrop of strong and persistent inflation and slowing growth, and warns that rising interest rates could impair the capacity of borrowers to service the historically high stock of global debt. He calls on authorities to closely monitor asset quality in those sectors most sensitive to higher interest rates, such as real estate. The letter highlights concerns over the build-up of leverage in the NBFI sector, described in a report being delivered to the Summit, and notes that addressing these risks will be a major focus of NBFI policy work next year.

The March banking-sector turmoil constituted a test of the financial reforms put in place following the 2008 crisis. It exposed vulnerabilities in individual institutions relating to poor liquidity and interest rate risk management and governance, and reinforced the need for strong and effective supervision and The FSB and the Basel Committee on Banking Supervision (BCBS) are examining the implications of these issues to identify lessons and adjust policy frameworks where needed. The FSB remains convinced that the international resolution framework developed by the FSB in the aftermath of the 2008 Global Financial Crisis is fit for purpose, but we have identified a number of implementation challenges that need to be addressed. To this end, the FSB will soon publish a report on preliminary lessons learned for resolution and policy priorities going forward.

The letter outlines the FSB’s work to address the financial stability implications of two secular trends – digitalisation and climate change. In response to the former, the FSB delivered to the G20 in July a set of recommendations for the regulation, supervision and oversight both of crypto-assets and markets and of global stablecoin arrangements. The FSB is now working with standard-setting bodies and international organisations to ensure that these recommendations are implemented globally. Recognising that crypto-assets raise both financial stability and macroeconomic risks, the FSB and IMF are delivering to the Summit a Synthesis Paper that brings together the risks identified by each institution and how they interact. The paper also includes a roadmap for future work.

Accelerating digitalisation across the financial system has improved efficiencies but also raised operational resilience challenges. For instance, the interconnectedness of the global financial system makes it possible that an incident at one financial institution, or at one of its third-party service providers, could have spill-over effects across borders and sectors. To address these risks the FSB issued in April recommendations to achieve greater convergence in cyber incident reporting frameworks. The FSB has also consulted on a policy toolkit that financial institutions and financial authorities can use to enhance their third-party risk management and oversight. The toolkit will be finalised in December.

In response to climate risks, the FSB is coordinating closely with standard-setting bodies and international organisations to implement the four building blocks of its Roadmap on Climate-related Financial Risks. An important milestone has been the publication of the International Sustainability Standards Board (ISSB)’s disclosure standards, which have been endorsed by the International Organization of Securities Commissions (IOSCO). The ISSB standards will strengthen the comparability, consistency and decision-usefulness of climate-related financial disclosures around the world. These standards can be seen as a culmination of the work of the FSB’s Task Force on Climate-related Financial Disclosures (TCFD), which has made a major global contribution since its creation in 2015.

A second letter provides to G20 Leaders an update on the G20 Cross-border Payments Roadmap. The first phase – the initial set of actions set out in the 2020 Roadmap – has now largely been completed. This year, in the second phase, the authorities and standard setters have focused their efforts on concrete projects that will make a difference across various parts of the cross-border landscape and on developing further the partnership with the private sector to work to achieve the Roadmap goals. The letter underscores the need for continued further political support and sustained effort by the public and private sectors in order to meet the G20 targets by 2027 to make cross-border payments cheaper, faster, more inclusive and more transparent. Leadership from the G20 has energised the public and private sectors and provided the political impetus, without which change will not happen.

A copy of the press release can be viewed here.

On June 26, 2023, the inaugural IFRS Sustainability Disclosure Standards were released. Specifically, the International Sustainability Standards Board (ISSB) issued IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures; and in response, the IFRS has updated its Educational Material: Effects of Climate-Related Matters on Financial Statements. The educational material helps companies comprehend how to report on “material” climate-related matters in their financial statements. While the IFRS Accounting standards (developed by the IASB), do not clearly refer to climate-related matters, consideration of material climate-related matters is required by the IASB’s standards. The IASB is also working on a project on Climate-Related Risks in Financial Statements, to improve upon a financial statements’ ability to convey climate-related risks. The IASB is also considering whether to include “sustainability-related risks and opportunities beyond those related to climate.”

On July 13, 2023, in response to the finalization of the International Sustainability Standards Board's (ISSB) global sustainability disclosure standards, the Financial Stability Board released its annual progress report on the FSB Roadmap for Addressing Climate-Related Financial Risks, which outlines advancements achieved in support of the roadmap that were made not only by the FSB, but also standard-setting bodies and other international organizations. The progress report further highlights areas that need additional consideration, as well as updates on Roadmap action items. On July 17-18 in a meeting in Gandhinagar, India, the progress report will be delivered to the G20 Finance Ministers and Central Bank Governors for review.

The FSB has made it clear it is in support of the ISSB's final standards. Finalization has prompted a handover in the responsibility to monitor progress made with firm disclosures. Monitoring responsibilities will shift from the Task Force on Climate-Related Financial Disclosures (TCFD), which was created by the FSB to develop recommendations on effective disclosures, to the ISSB in 2024. According to the FSB, there is progress in all four blocks of the Roadmap, including firm-level disclosures, data, vulnerabilities analysis, and regulatory and supervisory practices and tools.

More information on the FSB’s work on addressing climate-related financial risks is available here.

The Financial Stability Board (FSB) published for public consultation a toolkit for financial authorities and financial institutions as well as service providers for their third-party risk management and oversight.

The toolkit was developed against a backdrop of digitalisation of the financial services sector and growing reliance of financial institutions on third-party service providers for a range of services, some of which support their critical operations. These dependencies can bring many benefits to financial institutions including flexibility, innovation and improved operational resilience. However, if not properly managed, disruption to critical services or service providers could pose risks to financial institutions and, in some cases, financial stability.

The primary emphasis of the toolkit is on critical services given the potential impact of their disruption on financial institutions’ critical operations and financial stability. In light of changing industry practices and recent regulatory and supervisory approaches to operational resilience, the toolkit takes a holistic view of third-party risk management, which is wider than the historical focus on outsourcing. The principle of proportionality is applicable throughout the toolkit, allowing the tools to be adapted to smaller, less complex institutions or to intra-group third-party service relationships.

The toolkit aims to:

• Reduce fragmentation in regulatory and supervisory approaches to financial institutions’ third-party risk management across jurisdictions and different areas of the financial services sector;
• Strengthen financial institutions’ ability to manage third-party risks and financial authorities’ ability to monitor and strengthen the resilience of the financial system; and
• Facilitate coordination among relevant stakeholders (i.e. financial authorities, financial institutions and third-party service providers).

The Financial Stability Board issued its report setting out 16 recommendations to address these issues with a view to promote best practices in cyber incident reporting. Included in the Recommendations to Achieve Greater Convergence in Cyber Incident Reporting, were several recommendations made by World Council including proportionality language to help smaller community based financial institutions and language surrounding feedback loops to assist credit unions in defending themselves against cyber-attacks.

The report draws from the FSB’s body of work on cyber, including engagement with external stakeholders, the report identifies commonalities and details practical issues associated with the collection of cyber incident information from FIs and the onward sharing between financial authorities. These practical issues include:

1. operational challenges arising from the process of reporting to multiple authorities;
2. setting appropriate and consistent qualitative and quantitative criteria/thresholds for reporting;

• establishing an appropriate culture to report incidents in a timely manner;

1. inconsistent definitions and taxonomy related to cyber security;
2. establishing a secure mechanism to communicate on cyber incidents; and
3. legal or confidentiality constraints in sharing information with authorities across borders and sectors.

A copy of the report can be viewed here.

On February 23, 2023, the Financial Stability Board (FSB) released its G20 Roadmap for Enhancing Cross-Border Payments, Priority actions for achieving the G20 targets, which was provided to the G20 Finance Ministers and Central Bank Governors ahead of their meeting that took place on February 24-25^th. The report outlines analysis and stocktakes (including stockholder feedback) garnered over the first two years following its endorsement of its Roadmap for Enhancing Cross-Border Payments, released in 2020. In addition to highlighting its priority actions for attaining G20 targets, the report details actions to meet the quantitative targets by 2027 to “provide accountability and ambition”. To address the FSB’s priorities, it will work with the Committee on Payments and Market Infrastructures (CPMI) under two industry taskforces; and the International Monetary Fund (IMF) and World Bank will give technical assistance to jurisdictions outside of the G20’s purview.

The next phase of the FSB’s work on enhancing cross-border payments will consist of three priority themes:

• Payment system interoperability and extension. Actions include the extension of RTGS operation hours, interlinking payment systems, creating a forum for central banks to exchange practices, and finalizing requirements for cross-border payment service level agreements.
• Legal, regulatory and supervisory finalizing frameworks. Actions include promoting efficient legal, regulatory and supervisory environment for cross-border payments, improving consistency of bank and non-bank regulation and supervision, enhancing information provided to end-users, and updating the application of AML/CFT rules.
• Cross-border data exchange and message standards. Actions include facilitating cross-border data exchange and standardizing messaging formats, enhancing interaction between data frameworks and cross-border payments, improving API coordination, and exploring enhanced use of the legal entity identifier (LEI).

More information on the FSB’s its G20 Roadmap for Enhancing Cross-Border Payments, Priority actions for achieving the G20 targets is available here.

On February 20, 2023, in advance of the G20 meeting on February 24-25, the Financial Stability Board (FSB) released its letter from Chair, Klaas Knot to the G20 Finance Ministers and Central Bank Governors outlining its 2023 work including its objective “to monitor and address these vulnerabilities”. The letter also includes three reports covering non-bank financial intermediation (NBFI), crypto-assets and decentralized finance, and cross border payments. The FSB believes caution should be exercised when evaluating the current global economy due to “record-high” debt levels, “rising debt service costs and stretched asset valuations in some key markets". Further, the FSB plans to enhance cyber and operational resilience and will provide a revised report on cyber incident reporting. They will also work on enhancing disclosures, data and climate-related vulnerability analysis to address climate-related financial risks.

The key elements of the FSB's reports include:

• Non-bank financial intermediation: The Financial Stability Aspects of Commodity Markets report concentrates on vulnerabilities within the non-bank sector, specifically in the physical and derivatives commodities markets.
• Crypto-assets and decentralized finance: The report on The Financial Stability Risks of Decentralised Finance (DeFi) highlights vulnerabilities in DeFi systems and refers to policy recommendations to address the risks associated with DeFi, as well as data gaps for risk monitoring.
• Cross-border payments: The FSB will publish a report regarding the implementation of the G20 Roadmap to enhance cross-border payments. Two task forces will be formed “to strengthen private sector participation in taking the Roadmap forward.”

More information on the FSB’s work plans for 2023 are available here.

The World Council of Credit Unions urged the Financial Stability Board to consider the impact of it’s proposed revisions to international standards trying to achieve greater convergence in cyber incident reporting.  The comments came as part of the FSB’s consultation seeking to strengthen and harmonize frameworks surrounding operational resilience and the desire to increase efforts to reign in the effects of cyber incidents.

World Council agreed strongly with aspects of the consultation that are designed to get at the core roots and causes of cyber incidents.  It acknowledged that the findings of the FSB that cyber incidents are growing in frequency and sophistication and the risk of contagion across borders and sectors due to the growing interconnectedness of the financial system is likewise increasing.  It also noted that the FSB’s focus on increasing the sharing of timely and accurate information is well placed to create a system that is effective for incident response, recovery and promoting financial stability. 

World Council expressed concerns, however, that the solutions often called for expensive and extensive regulatory requirements that are not tailored to the size, risk, and complexity of credit unions, noting that credit unions rarely operate on a cross-border basis, are small in size as compared to large banks, and therefore pose little risk of contagion or “spill-over” effects on other countries.  World Council suggested that reporting be limited to simple, but actionable reporting and reporting that could be accomplished through established regulatory reporting without the need to create new bureaucracies.

The FSB is conducting this review at the request of the G20 and the ever increasing concern from regulators about the risk posed by cyber incidents.

A copy of the letter can be viewed here.

The Financial Stability Board (FSB) noted that the gradual withdrawal of relief measures granted during the COVID-19 crisis are best withdrawn gradually. This came as part of the FSB’s report to the G20 looking at financial policies in the wake of COVID-19 aimed at supporting equitable recovery and addressing the effects from scarring in the financial sector.

The report specifically notes the following:

FSB consulted on these measures where WOCCU noted in its comment letter that it is clear that national-level regulators should have the flexibility to have an orderly and gradual withdrawal of those COVID-19 related relief measures so as to not create unnecessary shocks to the balance sheets of credit unions. This is particularly prescient given the current global economy, increasing inflation, the effects from the conflict in Ukraine and many other localized events.

This guidance provides clear direction that national-level regulators can and should use flexibility in unwinding relief measures for credit unions.

On November 10, 2022, the Financial Stability Board (FSB) published its progress report on Enhancing the Resilience of Non-Bank Financial Intermediation (NBFI), which was provided to the G20, analyzing NBFI liquidity imbalances during times of financial market stress. The report includes policy proposals directed to issues of systemic risk, especially in light of stressors within the commodities and bond markets; as well as solutions of vulnerabilities identified in “money market funds, open-ended funds, margining practices, bond market liquidity, and cross-border USD funding in emerging market economies (EMEs).” The FSB plans to work with the International Organization of Securities Commissions (IOSCO) to improve short-term funding markets, and any other work to develop the resilience of liquidity provision in core bond markets.

More information on the FSB's progress report to the G20 can be found here.

On October 13, 2022, the Financial Stability Board released two reports on climate-related risks that were provided to the G20 Finance Ministers and Central Bank Governors ahead of their October 12-13, 2022 meeting. The reports follow the FSB’s 2021 publication of its Roadmap for Addressing Climate-related Financial Risks, and consist of recommendations for supervisory and regulatory approaches to climate-related risks, and progress made to climate-related disclosures.

The FSB’s final report on Supervisory and Regulatory Approaches to Climate-Related Risks, address “approaches to monitor, manage and mitigate cross-sectoral and system-wide risks arising from climate change and to promote consistent approaches across sectors and jurisdictions”; and the Progress Report on Climate-Related Disclosures, assesses the progress made over the past year by the International Sustainability Standards Board (ISSB) on developing its global baseline climate reporting standard, as well as work by international standard setters (national and regional authorities), and by firms regarding sustainability reporting. The FSB’s goal is to strengthen disclosures so that they are consistent and effective. The Task Force on Climate-Related Financial Disclosures (TCFD), which was created by the FSB, also released a 2022 status report on "TCFD-aligned disclosures”.

The final report on Supervisory and Regulatory Approaches to Climate-Related Risks, highlights:

• Supervisory and regulatory reporting and collection of climate-related data from financial institutions.
• System-wide supervisory and regulatory approaches and the extent to which supervisory and regulatory tools and policies address climate-related risk.
• Early consideration of other potential macroprudential policies and tools.

The Progress Report on Climate-Related Disclosures, highlights:

• Progress made by the International Sustainability Standards Board (ISSB) in developing its global baseline standard.
• Actions undertaken by jurisdictions to require or promote climate-related disclosures.
• Firms’ progress in making climate-related disclosures, as reported in the 2022 TCFD Status Report.

More information on the FSB’s reports on climate-related risks and climate-related disclosures is available here.

On October 10, 2022, the Financial Stability Board (FSB) published its Consolidated Progress Report for 2022 and Priorities for the Next Phase of Work, as a next phase for its work under the G20 Roadmap for Enhancing Cross-border Payments. The FSB wants to strengthen external engagement and partnership under the priorities, and plan to deliver both reports to G20 Finance Ministers and Central Bank Governors ahead of their meeting in Washington, DC on October 12-13, 2022. While the work under the 2021 and 2022 Roadmaps was foundational, the current “Roadmap has now reached an inflection point and needs to move to practical initiatives to enhance payment arrangements”. The FSB will focus three priority themes: Payment system interoperability and extension; legal, regulatory and supervisory frameworks; and cross-border data exchange and message standards.

With a 2027 target date, the FSB joins the Bank for International Settlements’ (BIS) the Committee on Payments and Market Infrastructures (CPMI), and other partners to set priorities for cross-border payments that will have the most impact, thereby enhancing the cost, speed, access and transparency of cross-border payments. The FSB has planned a Cross-border Payments Summit that will take place this month with leaders from both private and public sectors participating.

More information on the FSB’s priorities for enhancing cross-border payments is available here.

In anticipation of G20 meeting on October 12-13, 2022, in Afghanistan, the Financial Stability Board (FSB) Chair, Klass Knot, drafted a letter to the G20 Finance Ministers and Central Bank Governors regarding challenges to global financial stability. Since the Chair’s previous letter on financial challenges that was released in July, financial conditions have intensified with inflation increasing, issues related commodity markets or hidden leverage growing, and other vulnerabilities contributing to a weakening economic outlook.

The letter maintains that the FSB will continue to work on addressing these issues including a November progress report on strengthening the resilience of non-bank financial intermediation. Other reports on a regulatory framework for crypto-assets, improving cross-border payments, cyber risks, and climate-related financial risks will be made available for the G20 meeting in Afghanistan. The letter also mentions work on “Interoperability between the common global baseline and national and regional jurisdiction-specific requirements”, in addition to a publication of an October 13 status report on the FSB’s Task Force on Climate-related Financial Disclosures’ (TCFD) recommendations. The ISSB rely upon the TCFD's recommendations for its accounting standards, as well as by most FSB jurisdictions as a reference point. The letter also urges action by companies to improve disclosures related to climate-related financial risks.

On October 13, the FSB further plans to release two reports on climate-related financial risks. One report will involve the FSB's recommendations on supervisory and regulatory approaches to climate-related risks subject to stakeholder comments from a public consultation, and the second report will discuss useful and consistent climate-related disclosures.

More information on the FSB’s work on financial stability challenges and the Chair’s letter is available here.

WOCCU urged the Financial Stability Board to provide maximum flexibility to national level regulators in the withdrawal of relief measures implemented during the COVID-19 pandemic.  The comments cam as part of the Financial Stability Board’s (FSB) consultative report on the Exit strategies to support equitable recovery and address effects from COVID-19 scarring in the financial sector.

WOCCU noted their concern the impact and potential increase in institutional stress that a rapid withdrawal of relief will cause. Due to the consequences of the pandemic, characterized by high levels of unemployment, the deterioration of specific sectors of the economy and the loss of individual purchasing power, and the impact the war in Ukraine, inflation, rising gas prices, and other increasing costs, many financial entities may experience solvency, liquidity, and other problems in the short and medium term. Depending on the reality of each country and individual credit unions, a generalized deterioration in the quality of financial assets could generate a systemic contagion effect in the financial system of a country, or within the credit union sector.

WOCCU has long urged national-level regulators to work closely with credit unions on providing reasonable and attainable plans to restore norms that existed prior to the pandemic.  WOCCU will continue to work with international standard setters and national level regulators as the withdrawal of COVID-19 related relief measures are withdrawn.

A copy of the letter can be viewed here.

The Financial Stability Board (FSB) issued its letter to the G20 which is meeting during a time of growing financial stability challenges.  The G20 will have its Leaders’ Summitt in Indonesia in November.

The letter flags that the combination of lower growth, rising inflation and tighter global financial conditions may crystallise pre-existing vulnerabilities in the global financial system or give rise to new ones. In particular: rising indebtedness across sovereigns, non-financial corporates and households; liquidity mismatches in non-bank financial intermediation; and tightening financial conditions affecting Emerging Market and Developing Economies (EMDEs). The letter stresses that with the exit from COVID-19 well underway, it is important to rebuild macroprudential policy space whenever national conditions allow.

The letter outlines risks from commodity markets and notes that the FSB is analysing financial issues in commodity markets and closely monitoring the possible spillovers from commodities markets into the broader global financial system, as part of its ongoing surveillance.

The letter provides an overview of two areas of the FSB’s work for which documents have been submitted to the G20: addressing scarring and exit strategies from COVID-19; and progress under the FSB’s climate roadmap. The letter also provides an update on the FSB’s work on crypto-assets, following the issuance of a public statement on this topic.

A copy of the letter can be viewed here.

The FSB issued the FSB Roadmap for Addressing Financial Risks from Climate Change: 2022 progress report noting that policy action to address such risks is more urgent than ever. The report notes the increased frequency and intensity of extreme weather and climate-related events, and the intense debate about current and future energy policies in many jurisdictions, highlights that financial risks related to climate change, including transition risks, are not just a long-term issue or tail event.

Effective action continues to rest on strong international coordination. The G20 has asked the FSB to deliver in July 2022 the first of its annual progress reports on the Roadmap. The report summaries the progress across all four blocks of the Roadmap:

• Firm-level disclosures
• Data
• Vulnerabilities analysis
• Regulatory and supervisory practices and tools

This progress report was prepared in consultation with standard-setting bodies and other relevant international bodies and serves as input into broader international policy considerations, such as at the G20, G7 and UN, as well as to the work under the G20 Sustainable Finance Working Group (SFWG) roadmap on sustainable finance.

A copy of the report can be viewed here.

On April 26, 2022, the Financial Stability Board released a report, US Dollar Funding and Emerging Market Economy Vulnerabilities (EMEs), outlining its findings of work in collaboration with the IMF on the interaction between US dollar funding and external vulnerabilities in emerging market economies. The collaboration with the IMF is part of the FSB’s work programme on non-bank financial intermediation, intended to enhance the resilience of non-bank financial intermediation (NBFI).

The report discusses EME vulnerabilities stemming from foreign currency borrowing, and necessary policy measures to address those vulnerabilities supported by analysis of EME capital flows during March 2020, with an emphasis on the non-bank investor roles. These measures include a concentration on the “build-up of foreign exchange mismatches"; enhancing crisis management tools; and addressing data gaps to "facilitate risk monitoring and the timely adoption of policies.” Generally, the report highlights EME vulnerabilities derived from external funding and non-bank financing, while illuminating the policy work that both the FSB and the IMF must do in their respective countries and internationally to increase EMEs resilience to “future shocks”.

More information on the report and EME vulnerabilities is available here and here.

On April 20, 2022, the Financial Stability Board (FSB) published a letter from its Chair, Klass Knot, to the G20 Finance Ministers and Central Bank Governors in preparation for a meeting that took place on the same day. The letter outlined the status of global financial stability as well as the FSB’s plans to address emerging vulnerabilities. The letter further discusses the effects of Russia’s invasion of Ukraine on the global financial market including large price fluctuations and “concerns about the growth and potential use of crypto-assets”; however, these effects are far exceeded by the impact of the COVID-19 pandemic. Still, the Russian invasion is concerning as it is triggering inflation, which could promote restrictive financing; additionally, growing vulnerabilities may begin to present themselves in a material way, for example, high debt levels within the non-financial sector, and stretched valuations.

Issues of particular concern include linkages between commodity markets and the financial system; “financial system leverage and possible amplifiers in the event of market stress... and cyber risks”; heightened geopolitical tensions and rising energy and food prices within many emerging markets and developing economies are tacked on to already existing economic stressors from the pandemic; and “reduced policy space and tightening global financial conditions”. The FSB outlined actions items that include work on regulation and supervision of unbacked crypto-assets and stablecoins; increased monitoring of emerging vulnerabilities and market developments; continued work on G20 initiatives such as COVID-19 exit strategies and remedies; an upcoming report on US dollar funding and EME vulnerabilities related to external financing; and ongoing policy work related to financial risks from climate change.

More information on the FSB’s letter to the G20 is available here.

On March 31, 2022, the Financial Stability Board (FSB) published the FSB Work Programme for 2022, which outlines priorities, new initiatives, continuing items or those reaching completion, regular monitoring and reporting, and key deliverables to the G20 Indonesian Presidency. Some of the FSB’s priorities and initiatives include:

• Supporting international cooperation and coordination on current financial stability issues. This includes reinforced monitoring using the new surveillance framework, in light of the Russia-Ukraine conflict and its economic impacts. Further, the FSB will follow-up “on the lessons learnt from COVID-19 for financial stability report, and a report on exit strategies and effective practices for addressing the effects of COVID-19 scarring in the financial sector.”
• Enhancing the resilience of non-bank financial intermediation (NBFI). 
• Enhancing cross-border payments. The FSB will implement actions under its roadmap to enhance cross-border payments; and will deliver a progress report to the G20, along with “the development of key performance indicators to monitor progress towards the quantitative targets for the roadmap.”
• Harnessing the benefits of digital innovation while containing its risks.  The FSB will focus on crypto-assets, such as decentralised finance (DeFi); and will continue to concentrate on enhancing operational and cyber resilience.
• Addressing financial risks from climate change. “The FSB will continue to coordinate international work through its roadmap for addressing climate-related financial risks. The FSB’s own initiatives under the roadmap will focus on building and strengthening the analytical basis for monitoring climate-related risks to financial stability; identifying regulatory and supervisory approaches to address climate-related financial risks; and taking stock of progress in the implementation of the roadmap.”

More information on the FSB’s 2022 work programme is available here.

On March 21, 2022, the Financial Stability Board (FSB) released a report entitled, FinTech and Market Structure in the COVID-19 Pandemic: Implications for financial stability. The key takeaway of the report credited the COVID-19 pandemic for the acceleration of digitization of retail financial services. The report also discussed individual engagement with “innovative financial service providers and traditional financial incumbents”; the expansion of BigTechs and larger FinTechs into financial services and the data gaps they present; and whether the benefits of digital acceleration during the pandemic will become structural or will “revert back” to pre-pandemic levels as the current conditions go back to normal.

While the FSB commented that the arrival of BigTech and FinTech firms in the market could result in the improvement of cost efficiencies and broaden financial inclusion benefits for underserved groups, some concern was expressed over the risk that BigTech and FinTech firms may achieve market dominance. The report further laid out steps authorities have made during the pandemic to establish policy actions related to financial stability, competition, data privacy, and governance issues. It also stressed “the importance of cooperation between regulatory and supervisory authorities, including those charged with overseeing the bank and non-bank sectors, and where relevant, with competition and data protection authorities.”

More information on the FSB’s report is available here.

See also, BIS Releases Commentary Crediting Covid-19 for the Acceleration of Digitalization of Payments.

In advance of a meeting set for February 17 through 18, 2022, the Financial Stability Board (FSB) published a letter from their chair, Klass Knot, to the G20 Finance Ministers and Central Bank Governors. The letter details the work the FSB is doing this year to promote sustainable growth and global financial resilience in response to continuing COVID-19 issues such as uneven recovery across regions, inflation and record-high global debt levels. The FSB credits “determined” policy response and G20 post-2008 crisis reforms for current recovery successes which include bank and market infrastructure resilience.

These successes do not come without their challenges as the financial market is still dealing with COVID-19 fallout and trying to acclimate to what a post-pandemic market may reveal, including its effect on interest rates and asset prices, and vulnerabilities created by digital innovation. The FSB letter laid out the policy work planned for 2022 in response to efforts necessary for the market to transition to post-pandemic life, which include:

• “Supporting financial market adjustment to a post-COVID world including work on policy considerations to support a more even, sustainable and inclusive global recovery, and on effective financial sector practices for national authorities to consider for addressing the effects of COVID-19 scarring.
• Reinforcing financial system resilience in light of the COVID experience focusing on the FSB’s work to strengthen resilience in the non-bank financial intermediation (NBFI) sector through its NBFI work programme, including policy proposals to address systemic risk in NBFI.
• Harnessing the benefits of digitalisation while containing its risks including implementing the G20 Cross-Border Payments Roadmap and its associated quantitative targets; work to address the financial risks posed by crypto-assets; and developing best practices for regulatory reporting of cyber incidents.
• Addressing financial risks from climate change. Work here will focus on progressing the FSB’s roadmap for addressing climate-related financial risks.”

More information on FSB letter to the G20 and Central Bank Governors is available here.

In a newly released report, Assessment of Risks to Financial Stability from Crypto-assets, the Financial Stability Board (FSB) warns that crypto-assets could be a threat to global stability. The FSB argues that characteristics such as scale, structural vulnerabilities and interconnectedness with the “traditional’ financial system are considerable factors which may lead to financial instability on a global scale. The report further details developments and related vulnerabilities within unbacked crypto-assets, (i.e. Bitcoin); stablecoins; and decentralized finance (DeFi) in addition to other crypto-asset trading platforms, calling for “timely and pre-emptive evaluation of possible policy responses.”

While instability may not be imminent, according to the FSB, the crypto-asset market is growing exponentially, and could quickly become an issue. The FSB points out that in 2021, the market grew 3.5 times in capital to $2.6 trillion, which is fraction of the global assets within the financial system but still represents a rapid rate of growth. The report highlights Decentralized Finance (Defi) as an emerging sector that is quickly making an impact, stating that, “Some of these platforms operate outside of a jurisdiction’s regulatory perimeter or are not in compliance with applicable laws and regulations. This presents the potential for concentration of risks, and underscores the lack of transparency on their activities.”

More information on the FSB’s report can be found here and here.

The International Monetary Fund (IMF) and World Bank released a Draft Framework for Money Laundering and Terrorist Financing Risk Assessment of a Remittance Corridor, consisting of methodologies with the potential of identifying these corridors as “safe remittance corridors”, which are not intended define an absence of risk but a lower risk level. The goal of the framework is to simplify AML/CFT measures in lower risk remittance transactions For example, If the corridor risk assessment identifies an overall lower level of ML/TF risk, it can be treated as a safe remittance corridor and receive less stringent regulation such as simplified customer due diligence (CDD).

The draft framework serves as “a contribution to the FSB’s Roadmap for Enhancing Cross-Border Payments that was endorsed by G20 Leaders in 2020 and that aims to achieve faster, cheaper, more transparent, and more inclusive cross-border payment services.” The framework also addresses global correspondents’ tendency to terminate and restrict certain entities, as well as the use of de-risking to avoid instead of manage ML/TF. Credit unions have been increasingly subject to this treatment and World Council has consistently advocated for regulators to address the issue of de-risking. In response to the IMF-World Bank draft framework, the Financial Stability Board stated that, “The identification of safe remittance corridors based on a robust corridor risk assessment CRA can reconcile two important policy goals in relation to remittances: first, to support poverty alleviation and economic growth in low-income countries by safeguarding cost-effective transfer mechanisms; and second, to minimize the risk that these mechanisms will be used for criminal or terrorist purposes.”

More information on the IMF-World Bank draft framework is available here.

On December 10, 2021, it was announced that Lael Brainard, the current Governor of the US Federal Reserve Board, was appointed for a two-year term as Chair of the Financial Stability Board’s (FSB) Standing Committee on Assessment of Vulnerabilities (SCAV). Brainard succeeds Klaas Knot, President of De Nederlandsche Bank, who served as Chair of SCAV since September 2016. The SCAV “monitors and assesses vulnerabilities in the global financial system and proposes to the FSB Plenary actions needed to address them.” These assessments spotlight macro-financial vulnerabilities stemming from structural flaws within the financial system.

More information on the SCAV appointment is available here.

In the FSB Statement to Support Preparations for LIBOR Cessation, the Financial Stability Board (FSB) strongly urged market participants to finalize any final steps outlined in the FSB’s Global Transition Roadmap, as most LIBOR panels will end at the end of 2021. While some key USD settings will continue into June 2023 to allow legacy contracts to mature, the FSB states that, “Continued reliance of global financial markets on LIBOR poses risks to global financial stability.” The FSB has ensured participants that in the upcoming months they will continue to monitor the final steps of the LIBOR transition. 

Key details covered in the statement include:

• “Significant progress has been made in transitioning to Risk-Free Rates (RFRs), but market participants still need to finalise preparations to cease new use of LIBOR by end-2021.
• Transition should be primarily to overnight RFRs, the most robust benchmarks available, to avoid reintroducing the weaknesses of LIBOR.
• Active transition of legacy contracts remains the best way for market participants to have control and certainty over their existing arrangements.”

More information on the FSB’s Statement to Support Preparations for LIBOR Cessation is available here.