FSB Chair's Letter to G20 Ministers and Governors on financial regulatory reforms
Financial market conditions have improved over recent months. Nonetheless, medium-term downside risks remain, given weak growth prospects and high levels of public and private sector debt in many economies. The recent improvement in financial market conditions owes much to central bank actions, in particular, the accommodative monetary policy aimed at stimulating the economic recovery. As a consequence, market participants' appetite for risk has increased, but this has not yet translated into a robust recovery in real investment. The beginning of the return of risk appetite to financial markets - while intended and welcome - raises a number of issues. First, market participants and authorities need to be on guard against mispricing of risk and valuations of assets. Second, the importance of timely completion of the reforms to over-the-counter (OTC) derivatives markets and the shadow banking system has increased. Third, historically low interest rates in many countries pose challenges for institutional investors with long-dated liabilities and may leave market participants more vulnerable to unanticipated movements in the yield curve. Financial institutions and supervisors should continue to assess the resilience of the financial system through regular stress testing, notably of credit and interest rate risk, and complete the process of balance-sheet repair.