Enhancing the Resilience of Non-Bank Financial Intermediation: Progress report

1 November 2021 | PDF full text (1 MB)

The March 2020 turmoil has underscored the need to strengthen resilience in the NBFI sector.

This report describes progress to date and planned work by the FSB, as well as by standard-setting bodies (SSBs) and other international organisations, to enhance the resilience of non-bank financial intermediation (NBFI).

NBFI has grown considerably over the past decade – to almost half of global financial assets – and become more diverse. However, the March 2020 turmoil underscored the need to strengthen resilience in this sector, to ensure a more stable provision of financing to the economy and reduce the need for extraordinary central bank interventions. The FSB’s NBFI work programme includes analytical and policy work that builds on the lessons from the turmoil.

The report provides an overview of the NBFI ecosystem and a framework for analysing the availability of liquidity and its effective intermediation under stressed market conditions. Indeed, the ability of market participants to manage risks efficiently and minimise market dislocations when adjusting their portfolios is a key determinant of the functioning and resilience of the NBFI ecosystem. These dislocations become more likely in the case of large imbalances between liquidity supply and demand. NBFI resilience therefore depends on the behaviour of different types of entities in the NBFI ecosystem as well as on the infrastructure and activities that connect those entities together, and with other parts of the financial system.

The main focus of work to date has been on assessing and addressing vulnerabilities in specific areas that may have contributed to the build-up of liquidity imbalances and their amplification. This includes:

The NBFI progress report describes the key findings to date and next steps in all of these areas.

Building on these findings, the second part of the FSB’s work programme aims to develop a systemic approach to NBFI. It involves enhancing the understanding of systemic risks in NBFI to strengthen their ongoing monitoring; and, where appropriate, developing policies to address such risks. The focus of policy work is to ensure that the current policy toolkit is adequate and effective from a system-wide perspective, drawing on the lessons from the March 2020 market turmoil.

The table below summarises the work programme on NBFI for 2022 and beyond.

NBFI Progress Report Table 1

Environmental, Social and Governance (ESG) Ratings and Data Products Providers

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Recommendation 1: Regulators could consider focusing more attention on the use of ESG ratings and data products and ESG ratings and data products providers that may be subject to their jurisdiction.

Recommendation 2: ESG ratings and data products providers could consider adopting and implementing written procedures designed to help ensure the issuance of high quality ESG ratings and data products based on publicly disclosed data sources where possible and other information sources where necessary, using transparent and defined methodologies.

Recommendation 3: ESG ratings and data products providers could consider adopting and implementing written policies and procedures designed to help ensure their decisions are independent, free from political or economic interference, and appropriately address potential conflicts of interest that may arise from, among other things, the ESG ratings and data products providers’ organizational structure, business or financial activities, or the financial interests of the ESG ratings and ESG data products providers and their officers and employees.

Recommendation 4: ESG ratings and data products providers could consider identifying, avoiding or appropriately managing, mitigating and disclosing potential conflicts of interest that may compromise the independence and objectivity of the ESG ratings and ESG data products provider’s operations.

Recommendation 5: ESG ratings and data products providers could consider making adequate levels of public disclosure and transparency a priority for their ESG ratings and data products, including their methodologies and processes to enable the users of the product to understand what the product is and how it is produced, including any potential conflicts of interest and while maintaining a balance with respect to proprietary or confidential information, data and methodologies.

Recommendation 6: ESG ratings and data products providers could consider adopting and implementing written policies and procedures designed to address and protect all non-public information received from or communicated to them by any entity, or its agents, related to their ESG ratings and data products, in a manner appropriate in the circumstances.

Recommendation 7: Market participants could consider conducting due diligence or gathering and reviewing information on the ESG ratings and data products that they use in their internal processes. This due diligence or information gathering and review could include an understanding of what is being rated or assessed by the product, how it is being rated or assessed and, limitations and the purposes for which the product is being used.

Recommendation 8: ESG ratings and data products providers could consider improving information gathering processes with entities covered by their products in a manner that leads to more efficient information procurement for both the providers and these entities.

Recommendation 9: Where feasible and appropriate, ESG ratings and data products providers could consider responding to and addressing issues flagged by entities covered by their ESG ratings and data products while maintaining the objectivity of these products.

Recommendation 10: Entities subject to assessment by ESG ratings and data products providers could consider streamlining their disclosure processes for sustainability related information to the extent possible, bearing in mind jurisdictions’ applicable regulatory and other legal requirements

Recommendations on Sustainability-Related Practices, Policies, Procedures and Disclosure in Asset Management

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Recommendation 1: Asset Manager Practices, Policies, Procedures and Disclosure. Securities regulators and/or policymakers, as applicable, should consider setting regulatory and supervisory expectations for asset managers in respect of the: (a) development and implementation of practices, policies and procedures relating to material sustainability-related risks and opportunities; and (b) related disclosure.

Recommendation 2: Product Disclosure. Securities regulators and/or policymakers, as applicable, should consider clarifying and/or expanding on existing regulatory requirements or guidance or, if necessary, creating new regulatory requirements or guidance, to improve product-level disclosure in order to help investors better understand: (a) sustainability-related products; and (b) material sustainability-related risks for all products.

Recommendation 3: Supervision and Enforcement. Securities regulators and/or policymakers, as applicable, should have supervisory tools to monitor and assess whether asset managers and sustainability-related products are in compliance with regulatory requirements and enforcement tools to address any breaches of such requirements.

Recommendation 4: Terminology. Securities regulators and/or policymakers, as applicable, should consider encouraging industry participants to develop common sustainable finance related terms and definitions, including relating to ESG approaches, to ensure consistency throughout the global asset management industry.

Recommendation 5: Financial and Investor Education. Securities regulators and/or policymakers, as applicable, should consider promoting financial and investor education initiatives relating to sustainability, or, where applicable, enhance existing sustainability related initiatives.

FSB Chair’s letter to G20 Leaders: October 2021

28 October 2021 | PDF full text (176 KB)

Amid signs of global economic recovery, the global financial system confronts structural challenges.

This letter from the FSB Chair, Randal K. Quarles, was sent to G20 Leaders ahead of their October Summit.

The letter notes that the Rome Summit is taking place amid signs of the global economy recovering from the impact of COVID 19 and related containment measures (the COVID Event). At the same time, the global financial system confronts significant structural challenges. These include rapid technological innovations within the traditional financial sector as well as outside, such as in the form of various crypto-assets. They also include a growing focus on potential risks to financial stability from climate change, whether from severe weather events or from uncertainties related to policy actions by governments.

The letter notes that, during the Italian G20 Presidency, the FSB has continued to support policymakers in preserving financial stability during the COVID Event and laying the foundation for a more efficient and resilient financial system in the future. The FSB has done this in two key ways. First, by setting out lessons for financial stability made apparent by the COVID Event, which define a path forward for the G20 on financial stability policy. Second, the FSB has been coordinating international work on key structural issues, not least through the FSB roadmap to address climate-related financial risks and by taking forward the roadmap to enhance cross-border payments.

The letter outlines some key lessons learnt from the COVID Event, including that international cooperation through the G20 has made an important contribution to global financial stability. The letter stresses the need to assess the financial stability implications of financial, and particularly, technological innovation, and to ensure that supervisory and regulatory frameworks and approaches provide a solid foundation for harnessing the benefits of such innovation while containing their risks.

The FSB has been charting a path forward for its work by developing, as a top priority, a more systematic way of assessing vulnerabilities across the global financial system, through a new Financial Stability Surveillance Framework. The FSB has sought to increase input from a broad range of stakeholders, enhancing its transparency and expanding its outreach. Building on these strengths, the FSB is developing its workplan for 2022 in concert with the incoming G20 Indonesian Presidency to build a cohesive path forward.

Lessons learnt from the COVID-19 pandemic from a financial stability perspective: Final report

| PDF full text (504 KB)

The Italian G20 Presidency asked the FSB to identify preliminary lessons for financial stability from the COVID-19 pandemic.

This final report updates the July interim report on the preliminary lessons learnt for financial stability from the COVID-19 pandemic, and outlines actions by the FSB and other standard-setting bodies (SSBs) in response to those lessons. The update reflects feedback from external stakeholders and the FSB’s Regional Consultative Groups, recent studies in this area, and progress made in relevant international initiatives.

Key lessons and actions include:

  • Market and institutional resilience. The functioning of bank capital and liquidity buffers may warrant further attention; the Basel Committee on Banking Supervision will update its overall analysis on the lessons from the pandemic. The March 2020 market turmoil underscored the need to strengthen resilience in the non-bank financial intermediation sector; the FSB is taking forward a comprehensive work programme. Some concerns about possible excessive procyclicality in the financial system remain; standard-setters will take forward work in procyclicality in margining practices and the Basel Committee will further monitor expected credit loss provisioning.
  • Operational resilience. COVID-19 has highlighted the importance of effective operational risk management being in place before a shock hits. The FSB will develop best practices for the types of information authorities may require related to cyber incidents to promote financial stability. The FSB is also launching further work related to third-party risk management and outsourcing, and will develop expectations for financial authorities’ use in oversight of financial institutions’ reliance on critical service providers.
  • Crisis preparedness. The pandemic highlighted the importance of effective cross-border cooperation, coordination and risk-sharing. The FSB will identify a set of good practices and emerging practices of crisis management groups to enhance preparedness for, and facilitate the management and resolution of, a cross-border financial crisis affecting a global systemically important bank (G-SIB).

The report also highlights broader policy issues that warrant further attention. These include: monitoring COVID-19 policy responses as they are wound down, in order to identify systemic vulnerabilities early on; addressing debt overhang in the non-financial corporate sector; promoting resilience amidst rapid technological change; completing the remaining elements of the post-2008 crisis reform agenda; and examining in due course how macroprudential policy has functioned during the pandemic and its aftermath.

FSB Chair reports to G20 Leaders ahead of the Rome Summit

Press enquiries:
+41 61 280 8477
[email protected]
Ref: 29/2021

The Financial Stability Board (FSB) today published a letter from its Chair, Randal K Quarles, to G20 Leaders ahead of their Summit in Rome this week.

The letter notes that the Rome Summit is taking place amid signs of the global economy recovering from the impact of COVID 19 and related containment measures (the COVID Event). At the same time, the global financial system confronts significant structural challenges. These include rapid technological innovations within the traditional financial sector as well as outside, such as in the form of various crypto-assets. They also include a growing focus on potential risks to financial stability from climate change.

During the 2021 Italian G20 Presidency, the FSB has continued to support policymakers in preserving financial stability during the COVID Event and laying the foundation for a more efficient and resilient financial system in the future. The FSB has done so in two key ways. First, by setting out lessons for financial stability made apparent by the COVID Event, which define a path forward for the G20 on financial stability policy. Second, by coordinating international work on key structural issues, not least through the FSB roadmap to address climate-related financial risks and by taking forward the roadmap to enhance cross-border payments.

The FSB Chair charts a path forward for addressing future threats to financial stability that emerge. This year, the FSB published its new comprehensive, disciplined and forward-looking systematic Financial Stability Surveillance Framework, which will further increase the effectiveness of vulnerabilities and the timeliness of follow-up actions. The effectiveness of the FSB during the COVID Event as a mechanism for financial stability has come from the FSB institutional process for international coordination and cooperation and its broad and diverse membership.

The letter is Mr Quarles’ final one to the G20 before his 3-year term as FSB Chair ends on 1 December.

Lessons learnt report

Accompanying the Chair’s letter to G20 Leaders is a report on lessons learnt from COVID-19 from a financial stability perspective, which the FSB also published today. The report, updates the assessment provided in the July interim report and outlines actions by the FSB and other standard-setting bodies in response to those lessons.

Key lessons and actions include:

  • Market and institutional resilience. The functioning of bank capital and liquidity buffers may warrant further attention; the Basel Committee on Banking Supervision will update its overall analysis on the lessons from the pandemic. The March 2020 market turmoil underscored the need to strengthen resilience in the non-bank financial intermediation sector; the FSB is taking forward a comprehensive work programme. Some concerns about possible excessive procyclicality in the financial system remain; standard-setters will take forward work in procyclicality in margining practices and the Basel Committee will further monitor expected credit loss provisioning.

  • Operational resilience. COVID-19 has highlighted the importance of effective operational risk management being in place before a shock hits. The FSB will develop best practices for the types of information authorities may require related to cyber incidents to promote financial stability. The FSB is also launching further work related to third-party risk management and outsourcing, and will develop expectations for financial authorities’ use in oversight of financial institutions’ reliance on critical service providers.

  • Crisis preparedness. The pandemic highlighted the importance of effective cross-border cooperation, coordination and risk-sharing. The FSB will identify a set of good practices and emerging practices of crisis management groups to enhance preparedness for, and facilitate the management and resolution of, a cross-border financial crisis affecting a global systemically important bank (G-SIB).

The report also highlights broader policy issues that warrant further attention. These include: monitoring COVID-19 policy responses as they are wound down, in order to identify systemic vulnerabilities early on; addressing debt overhang in the non-financial corporate sector; promoting resilience amidst rapid technological change; completing the remaining elements of the post-2008 crisis reform agenda; and examining in due course how macroprudential policy has functioned during the pandemic and its aftermath.

Notes to editors

The FSB coordinates at the international level the work of national financial authorities and international standard-setting bodies and develops and promotes the implementation of effective regulatory, supervisory, and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with approximately 70 other jurisdictions through its six Regional Consultative Groups.

The FSB is chaired by Randal K. Quarles, Governor, US Federal Reserve; its Vice Chair is Klaas Knot, President of De Nederlandsche Bank. The FSB Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.

Updated Guidance for a risk-based approach to virtual assets and virtual asset service providers

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The virtual asset sector is fast-moving and technologically dynamic, which means continued monitoring and engagement between the public and private sectors is necessary. The FATF issued a Guidance in June 2019, following the revisions to the FATF Recommendations in October 2018 and June 2019, in response to the increasing use of virtual assets for money laundering and terrorist financing.  The FATF strengthened its standards to clarify the application of anti-money laundering and counter- terrorist financing requirements on virtual assets and virtual asset service providers (VASPs). Countries are now required to assess and mitigate their risks associated with virtual asset financial activities and providers; license or register providers and subject them to supervision or monitoring by competent national authorities. VASPs are subject to the same relevant FATF measures that apply to financial institutions.

The Guidance was updated in October 2021. It is intended to help both national authorities in understanding and developing regulatory and supervisory responses to virtual asset activities and virtual asset service providers, and to help private sector entities seeking to engage in these activities, in understanding their AML/CFT obligations and how they can effectively comply with these requirements.

The updated Guidance forms part of the FATF’s ongoing monitoring of the virtual assets and VASP sector. The updated Guidance, which benefited from dialogue with the private sector, also includes examples of national approaches to regulating and supervising virtual asset activities and VASPs to prevent their misuse for money laundering and terrorist financing. In particular, it focuses on the following six key areas: i) clarification of the definitions of virtual assets and VASPs; ii) guidance on how the FATF Standards apply to stablecoins; iii) additional guidance on the risks and the tools available to countries to address the money laundering and terrorist financing risks for peer-to-peer transactions; iv) updated guidance on the licensing and registration of VASPs; v) additional guidance for the public and private sectors on the implementation of the “travel rule”; and vi) principles of information-sharing and co-operation amongst VASP supervisors.

2021 FSB Annual Report

27 October 2021 | PDF full text (3 MB)

This revamped Annual Report describes the FSB’s work to promote global financial stability.

With the FSB’s overall work shifting increasingly to new topics and the assessment of new and emerging risks, this year’s Annual Report has been revamped to be more forward-looking and encompassing. The current version of the report presents the FSB’s high-level assessment of current vulnerabilities in the global financial system; describes the main findings of the FSB’s ongoing financial stability work and implications for the functioning and resilience of the global financial system; and takes stock of progress by FSB members in implementing G20 reforms and reports on the findings of evaluations on the effects of those reforms.

The Annual Report in a nutshell

The report notes that the outlook for financial stability continues to be dominated by the COVID-19 pandemic, with the recovery uneven across economies and sectors. It highlights financial vulnerabilities related to stretched asset valuations and high non-financial sector debt, stemming from the combination of pronounced economic uncertainty, easy financing conditions and sustained policy support. A rapid tightening in financial conditions following a strong bounce-back in the global economy, or a strong resurgence of the pandemic leading to another round of strict lockdowns, could trigger these vulnerabilities.

The report highlights the analytical and policy work the FSB is carrying out to foster global financial stability in response to the pandemic as well as to new and emerging risks. This includes, amongst others, work to enhance the resilience of NBFI; cyber incident response and recovery; to address risks from so-called “global stablecoin” arrangements; to enhance cross-border payments; and to assess and address climate-related financial risks.

The report finds that there has been limited additional progress in implementing G20 reforms over the past year, as authorities have focused on responding to the impacts of the pandemic. Regulatory adoption of core Basel III elements has generally been timely to date, but implementation of the final reforms to the capital framework is still at a very early stage. More work is also needed to close gaps in the operationalisation of banks’ resolution plans and to implement effective resolution regimes for insurers and central counterparties.

The report notes that the COVID experience provides important lessons for the functioning of the G20 reforms and reinforces the importance of global regulatory cooperation and of completing the remaining elements of the post-crisis reform agenda. Those parts of the financial system where implementation is most advanced displayed greater resilience and were able to cushion, rather than amplify, the shock. The financial stability benefits of the full, timely and consistent implementation of G20 reforms remain as relevant as when they were initially agreed. The FSB and standard-setting bodies will continue to promote approaches to deepen international cooperation, coordination and information-sharing, with the support of the G20.

FSB’s revamped Annual Report describes its work to promote global financial stability

Press enquiries:
+41 61 280 8477
[email protected]
Ref: 28/2021

The Financial Stability Board (FSB) today published its latest Annual Report. The report, which is being delivered to the G20 Leaders ahead of their Summit, describes the FSB’s work to promote global financial stability.

The report notes that the outlook for financial stability continues to be dominated by the COVID-19 pandemic, with the recovery uneven across economies and sectors. It highlights financial vulnerabilities related to stretched asset valuations and high non-financial sector debt, stemming from the combination of pronounced economic uncertainty, easy financing conditions and sustained policy support. A rapid tightening in financial conditions following a strong bounce-back in the global economy, or a strong resurgence of the pandemic leading to another round of strict lockdowns, could trigger these vulnerabilities.

The report highlights the analytical and policy work the FSB is carrying out to foster global financial stability in response to the pandemic as well as to new and emerging risks. This includes, amongst others, work to enhance the resilience of NBFI; cyber incident response and recovery; to address risks from so-called “global stablecoin” arrangements; to enhance cross-border payments; and to assess and address climate-related financial risks.

The report finds that there has been limited additional progress in implementing G20 reforms over the past year, as authorities have focused on responding to the impacts of the pandemic. Regulatory adoption of core Basel III elements has generally been timely to date, but implementation of the final reforms to the capital framework is still at a very early stage. More work is also needed to close gaps in the operationalisation of banks’ resolution plans and to implement effective resolution regimes for insurers and central counterparties.

The report notes that the COVID experience provides important lessons for the functioning of the G20 reforms and reinforces the importance of global regulatory cooperation and of completing the remaining elements of the post-crisis reform agenda. Those parts of the financial system where implementation is most advanced displayed greater resilience and were able to cushion, rather than amplify, the shock. The financial stability benefits of the full, timely and consistent implementation of G20 reforms remain as relevant as when they were initially agreed. The FSB and standard-setting bodies will continue to promote approaches to deepen international cooperation, coordination and information-sharing, with the support of the G20.

Notes to editors

The FSB has published annual reports on the implementation and effects of the G20 financial regulatory reforms since 2015. Their main purpose was to highlight progress made by FSB members in implementing regulatory reforms to fix the fault lines that led to the 2008 global financial crisis and build a safer, more resilient financial system.

With the FSB’s overall work shifting increasingly to new topics and the assessment of new and emerging risks, this year’s report has been revamped to be more forward-looking and encompassing. The current version of the report presents the FSB’s high-level assessment of current vulnerabilities in the global financial system; describes the main findings of the FSB’s ongoing financial stability work and implications for the functioning and resilience of the global financial system; and takes stock of progress by FSB members in implementing G20 reforms and reports on the findings of evaluations on the effects of those reforms.

The FSB coordinates at the international level the work of national financial authorities and international standard-setting bodies and develops and promotes the implementation of effective regulatory, supervisory, and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with approximately 70 other jurisdictions through its six Regional Consultative Groups.

The FSB is chaired by Randal K. Quarles, Governor, US Federal Reserve; its Vice Chair is Klaas Knot, President of De Nederlandsche Bank. The FSB Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.

FSB appoints new chairs to key committees

19 October 2021

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Ref: 26/2021

The Financial Stability Board, at its Plenary virtual meeting on 18 October, appointed the chairs of two of its Standing Committees and the Resolution Steering Group, following the completion of the previous chairs’ terms:

  • Mr Andrew Bailey, Governor, Bank of England, has been appointed as Chair of the Standing Committee on Supervisory and Regulatory Cooperation (SRC), as from 19 October 2021. The SRC addresses key financial stability risks through the development of supervisory and regulatory policies and coordinates issues that arise among supervisors and regulators to ensure effective consideration of cross-sector and international implications.
  • Mr Fahad Almubarak, Governor, Saudi Central Bank, has been appointed as Chair of the Standing Committee on Standards Implementation (SCSI), as from 19 October 2021. The SCSI undertakes FSB peer reviews of its members, encourages global adherence to international financial standards and reports on members’ progress in implementing these standards and other agreed G20 and FSB commitments.
  • Ms Jelena McWilliams, Chairman, Federal Deposit Insurance Corporation, has been appointed as Chair of the Resolution Steering Group (ReSG), as from 1 November 2021. The ReSG leads the FSB’s work on resolution regimes, resolution planning and resolvability assessments for all sectors.

Each appointment is for a two-year term, renewable once.

The Plenary thanked the outgoing Chairs, Himino Ryozo (former Commissioner, Japan Financial Services Agency, and outgoing Chair of SRC), Lesetja Kganyago (Governor, South African Reserve Bank, and outgoing Chair of SCSI) and Mark Branson (President, Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin), and outgoing Chair of ReSG), for their exemplary leadership of their respective committees.

Notes to editors

The FSB Standing Committees were established by the FSB Plenary to each take forward part of the FSB’s mandate. Their mandates are set out in the FSB Charter, and their current memberships are available here. The work of the Standing Committees is linked together in that financial system vulnerabilities identified by the SCAV may call for the development of a policy response by the SRC and monitoring of members’ implementation of that agreed policy by the SCSI.

The Resolution Steering Group (ReSG) was established in 2010 in response to a call of G20 Leaders at the 2009 Pittsburgh Summit for the development of “tools and frameworks for the effective resolution of financial groups to help mitigate the disruption of financial institution failures and reduce moral hazard in the future”. ReSG’ s initial mandate was to draft the Key Attributes of Effective Resolution Regimes for Financial Institutions (‘Key Attributes’) to help build a common policy framework that countries could use to develop resolution regimes enabling authorities to manage the failure of systemically important financial institutions.

The FSB coordinates at the international level the work of national financial authorities and international standard-setting bodies and develops and promotes the implementation of effective regulatory, supervisory, and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with approximately 70 other jurisdictions through its six Regional Consultative Groups.

The FSB is chaired by Randal K. Quarles, Governor, US Federal Reserve; its Vice Chair is Klaas Knot, President of De Nederlandsche Bank. The FSB Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.