FSB Chair’s letter to G20 Finance Ministers and Central Bank Governors: July 2021

7 July 2021 | PDF full text (160 KB)

On the road to normality some risks to financial stability still remain elevated. The FSB also remains vigilant financial stability risks beyond COVID, including climate change and LIBOR transition.

The letter notes mounting evidence of global recovery, even if uneven across regions. However, some risks to financial stability remain elevated. The global financial system has weathered the COVID Event thus far, thanks to greater resilience brought about by the G20 financial regulatory reforms, and the swift, bold and determined international policy response. But there are areas where there is a need to understand better whether the reforms have functioned as intended, and others where the COVID Event has surfaced vulnerabilities that need to be addressed with urgency, notably in non-bank financial intermediation, including in money market funds.

The Chair’s letter stresses the need for coordinated action to address financial risks posed by climate change, noting the large, and growing, number of international initiatives underway. The FSB has submitted to the G20 for endorsement a comprehensive roadmap to address climate-related financial risks. The roadmap outlines the work underway and still to be done by standard-setting bodies and other international organizations over a multi-year period in four key policy areas: disclosures, data, vulnerabilities analysis, and regulatory and supervisory approaches.

The Chair’s letter also reiterates the importance of completing the transition way from LIBOR to robust alternative rates by end-2021 and strongly urges market participants to act now to complete the steps set out in the FSB’s Global Transition Roadmap.

FSB Roadmap for Addressing Climate-related Financial Risks

| PDF full text (1 MB)

There is a need to coordinate the large and growing number of international initiatives underway on addressing financial risks from climate change.

There is a growing focus on potential risks to financial stability from climate change. A large, and growing, number of international initiatives are underway on addressing financial risks from climate change. Ongoing work by official sector bodies, including the FSB, NGFS, BCBS, IAIS, IOSCO, OECD, IMF and World Bank, and a variety of private sector bodies on climate issues have been added to recently by the IFRS Foundation proposal to establish an International Sustainability Standards Board (ISSB), initially focused on climate-related reporting. More generally, climate topics are being given an important place in both the G20 and G7 agendas for 2021, and preparations are underway for COP26.

This roadmap for addressing climate-related financial risks, which has been prepared in consultation with standard-setting bodies (SSBs) and other relevant international bodies, supports international coordination in several ways.

  • It promotes relevant initiatives at standard-setting bodies, the NGFS and other international organisations.

  • By presenting relevant ongoing and planned international work in one place, it helps to identify gaps to be covered by further work, limit overlap and promote synergies.

  • It sketches out how the FSB can serve as a forum for discussing cross-sectoral and systemic issues and agreeing a way forward.

  • It provides input into broader international policy considerations by facilitating communication with the G20, G7 and COP26.

All this supports the consistency of actions to be taken over the coming years, enhances authorities’ ability to address financial stability risks and reduces the risk of harmful market fragmentation.

The roadmap focuses on work to assess and address financial risks of climate change through four main, interrelated areas: firm-level disclosures; data; vulnerabilities analysis and regulatory and supervisory tools.

The FSB roadmap sets out a comprehensive and coordinated plan for addressing climate-related financial risks, including steps and indicative timeframes needed to do so, and paves the way for implementation. It will be delivered to the G20 Finance Ministers and Central Bank Governors meeting in July 2021.

The Availability of Data with which to Monitor and Assess Climate-related Risks to Financial Stability

| PDF full text (818 KB)

Addressing data gaps will enhance the monitoring of climate-related financial risks and enable market participants to incorporate such risks more effectively in their decisions.

This report examines the availability of data with which to monitor and assess climate-related risks to financial stability. It is the latest in a series of FSB reports concerning climate change. Previous reports were the FSB’s stocktake of financial authorities’ experience in including climate risks as part of their financial stability monitoring, and The Implications of Climate Change for Financial Stability.

Risks to financial stability from climate change differ in their nature and magnitude from other risks to the financial system. Climate change is a global phenomenon and can impact financial systems across all jurisdictions. However, its impact differs substantially across entities, sectors and economies. Climate-related risks may be highly non-linear, and their effects on the financial system subject to substantial uncertainty and tail risk.

The specific nature of climate-related risks has a bearing on the data needed to monitor and assess their implications for financial stability. This data should:

  • Capture exposures of financial firms to climate-related risks, particularly those of a scale or concentration that might threaten financial stability.

  • Support a global comparison and aggregation of financial firms’ exposures to climate-related risks.

  • Support forward-looking assessments of climate-related risks to financial stability.

  • Capture climate-related risk transfer and mitigation.

The report outlines priority areas of work – some of which are already in progress – that should address important data gaps to improve the monitoring and assessment of climate-related risks to financial stability:

  • improving the availability and consistency of data on the underlying drivers of climate-related risks;

  • developing a baseline global sustainability reporting standard under robust governance and public oversight – the FSB welcomes the IFRS’s programme of work in this regard;

  • improving the quality and consistency of data on financial institutions’ exposures to climate-related risks arising from their exposures to non-financial counterparties

  • developing – including via engagement with private-sector providers of data – forward-looking metrics on climate-related risks, both at the level of individual firms and the financial system as a whole;

  • widening and harmonising data on the degree to which individual financial institutions’ exposures to climate-related risks are mitigated by insurance provision;

  • comparing authorities’ experiences of implementing scenario analysis as a means of assessing the resilience of the financial system to climate-related risks, and to identify relevant data gaps; and

  • the NGFS continuing to refine and develop scenarios, which financial authorities should make use of in their scenario analysis, as appropriate in order to align the data and methodologies used in such analysis.

Work in these areas should be undertaken in a manner appropriate to authorities’ mandates and domestic legal frameworks.

This report was prepared in close coordination with other international bodies and draws on a number of inputs. In particular, it has benefited from contributions from the BCBS, IAIS, IMF, IOSCO, OECD and the World Bank. It has also been informed by the work of the Task Force on Climate-related Financial Disclosures (TCFD).

The report complements the NGFS’s Workstream on Bridging Data Gaps. This NGFS workstream is undertaking a more comprehensive assessment of the availability of data, including to facilitate the scaling up of green finance.

Report on promoting climate-related disclosures

| PDF full text (640 KB)

Globally consistent and comparable disclosures by firms of their climate-related financial risks are increasingly important to market participants and financial authorities.

In an environment with a proliferation of third-party frameworks for climate-related disclosures, global alignment of practices will help deliver consistent and comparable disclosures and foster convergence. The implementation of climate-related disclosures, using a framework based on the TCFD Recommendations, would be an important step forward on the path towards convergence with anticipated international reporting standards on climate. Global alignment of practices would help deliver consistent and comparable disclosures and foster convergence. The FSB welcomes the IFRS Foundation’s programme of work to develop a baseline global sustainability reporting standard under robust governance and public oversight, built from the TCFD framework and the work of an alliance of sustainability standard-setters, involving them and a wider range of stakeholders closely, including national and regional authorities.

The FSB surveyed its members in H1 2021 to explore national/regional practices of financial authorities on promoting climate related disclosures. The survey identified gaps and challenges in the implementation of requirements or guidance based on the TCFD Recommendations. These relate to:

  1. the consistency of climate-related disclosures (including the use of TCFD Recommendations as the basis for frameworks and for coordination across jurisdictions and within each jurisdiction); and

  2. the reliability of climate-related disclosures (including the use of regulatory or supervisory mechanisms to drive progress and third-party verification).

The report sets high-level guidance, in the form of recommendations, to support financial authorities in their development of frameworks, as they consider appropriate to their wider public policy objectives, regulatory and legal frameworks. The report recommends that:

  • Financial authorities use a framework based on the TCFD Recommendations across all sectors for climate-related financial disclosures, in line with jurisdictions’ regulatory and legal requirements.

  • Financial authorities promote sharing of experiences, provide mutual support across jurisdictions on implementation of climate-related disclosure frameworks and accelerate international efforts to help build industry-wide awareness, technical knowledge and capabilities.

  • Financial authorities strongly coordinate in order to provide clear and consistent expectations, guidance or requirements to firms across all sectors on climate-related disclosures.

  • as disclosure practices continue to evolve and improve over time, in the longer term, authorities can help to improve the reliability of climate-related disclosures if they were to require, as appropriate, some form of third-party verification or assurance on such disclosures made by firms.

Continued coordination among financial authorities at the jurisdiction level and global coordination across jurisdictions and with relevant organisations is paramount to support the call for an acceleration in progress.

FSB Chair presents a comprehensive roadmap for addressing climate-related financial risks

Press enquiries:
+41 61 280 8477
[email protected]
Ref no: 18/2021

The Financial Stability Board (FSB) today published a letter from its Chair, Randal K. Quarles, to G20 Finance Ministers and Central Bank Governors ahead of their 9-10 July meeting.

The letter notes mounting evidence of global recovery, even if uneven across regions. However, some risks to financial stability remain elevated. The global financial system has weathered the COVID Event thus far, thanks to greater resilience brought about by the G20 financial regulatory reforms, and the swift, bold and determined international policy response. But there are areas where there is a need to understand better whether the reforms have functioned as intended, and others where the COVID Event has surfaced vulnerabilities that need to be addressed with urgency, notably in non-bank financial intermediation, including in money market funds.

  • On 30 June, the FSB published a consultation report on policy proposals to enhance money market fund resilience.

  • On 13 July, the FSB will publish an interim report on the overall lessons learnt from the COVID Event from a financial stability perspective.

The Chair’s letter stresses the need for coordinated action to address financial risks posed by climate change, noting the large, and growing, number of international initiatives underway. The FSB has submitted to the G20 for endorsement a comprehensive roadmap to address climate-related financial risks. The roadmap outlines the work underway and still to be done by standard-setting bodies and other international organizations over a multi-year period in four key policy areas: disclosures, data, vulnerabilities analysis, and regulatory and supervisory approaches. In total, the FSB is publishing today three climate-related reports:

The Chair’s letter also reiterates the importance of completing the transition way from LIBOR to robust alternative rates by end-2021 and strongly urges market participants to act now to complete the steps set out in the FSB’s Global Transition Roadmap.

  • On 6 July, the FSB published its latest progress report on LIBOR transition.

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, Vice Chairman, 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.

Press release available as: PDF

Progress report to the G20 on LIBOR transition issues: Recent developments, supervisory issues and next steps

6 July 2021 | PDF full text (3 MB)

The publication of the majority of LIBOR settings will cease in less than half a year

With the end of 2021 getting ever nearer, the transition away from LIBOR is a significant priority for the FSB. Continued engagement from the private sector, in conjunction with a significant commitment by the official sector, remains critical in order to support this transformational effort and to support financial stability on a sustainable basis.

The majority of LIBOR panels will cease at the end of the year, with a number of key US dollar settings continuing until end-June 2023 to support the rundown of legacy contracts only. With clear cessation dates now confirmed, progress needs to accelerate in order to achieve a timely transition. A smooth and orderly transition requires, at a minimum, steps to stop issuance of new products linked to LIBOR and efforts to transition away from LIBOR in legacy contracts wherever feasible.

Since its first benchmark transition report in 2014, the FSB has continually highlighted the structural post-financial crisis decline in liquidity in the interbank unsecured funding markets underpinning IBOR benchmarks. For example, published data show that LIBOR rates are largely reliant on judgement-based submission rather than on market transactions, demonstrating that interbank unsecured funding markets are an unsustainable reference source.

Loan markets remain an area of concern, with much new lending still linked to LIBOR, increasing the stock of contracts affected by its discontinuation.  The report stresses that the tools necessary to complete the transition are currently available, and have been for some time. Market participants must not wait for the development of additional tools.  Over the past several years, market participants have established mechanisms to use compounded risk-free rates (RFRs) not only in derivative markets, where use of RFRs was already common, but also in the cash markets. The FSB recognises that in some cases there may be a role for RFR-derived term rates.

On the international front, the report stresses that collaboration and coordination remain crucial in expediting transition progress. The FSB encourages authorities to set globally consistent expectations and milestones that firms will rapidly cease the new use of LIBOR, regardless of where those trades are booked or in which currency they are denominated.

The report points to the FSB’s recently updated Global Transition Roadmap, which, drawing on national working group recommendations, summarises the high-level steps firms will need to take now and over the course of 2021 to complete the transition away from LIBOR. Given the limited available until end-2021, the FSB strongly urges market participants to act now to complete the steps set out in the roadmap.

FSB urges action to complete the transition away from LIBOR by end-2021

Press enquiries:
+41 61 280 8477
[email protected]
Ref no: 17/2021

The Financial Stability Board (FSB) today published a progress report to the G20 on LIBOR transition and remaining issues.

With timelines for cessation of LIBOR panels now confirmed, there should be no remaining doubts as to the urgency of the need to transition away from LIBOR by the end of 2021. The FSB encourages authorities to set globally consistent expectations and milestones that firms will rapidly cease the new use of LIBOR, regardless of where those trades are booked or in which currency they are denominated. Market participants are urged to cease new use of LIBOR in all currencies as soon as practicable, respecting national working group timelines and supervisory guidance where applicable, and in any case no later than the end of 2021.

Given the extent of risks associated with a failure to prepare adequately for LIBOR transition, the onus is now on firms to act. With limited time available until end-2021, the FSB strongly urges market participants to act now to complete the steps set out in its Global Transition Roadmap. Financial and non-financial institutions need to accelerate adoption of robust benchmark rates in new contracts, as well as active conversion of legacy LIBOR-referencing contracts to directly reference risk-free rates and/or insert robust fallback language.

Supervisory authorities should step up their efforts for active and adequate communication to increase awareness of the scope and urgency of relevant IBOR transitions for all clients. The FSB, through its Regional Consultative Groups, will undertake work to support transition in emerging market and developing economies, where engagement with financial institutions on transition planning is in general lagging.

Arthur Yuen, Deputy Chief Executive of the Hong Kong Monetary Authority and lead of the FSB team on supervisory issues related to LIBOR transition, said, “As end-2021 is fast approaching, it is crucial for authorities to monitor progress against expected milestones and maintain close supervisory dialogue with regulated financial institutions to ensure a smooth and robust transition.”

Andrew Bailey, Governor of the Bank of England and Co-Chair of the FSB’s Official Sector Steering Group said, “We are now in the final chapter in the global process to transition markets from LIBOR rates. Basing reference rates on insufficiently active markets creates a fundamental weakness, and transition from LIBOR needs to focus on addressing this. Using robust overnight risk-free rates that are based on large flows of actual transactions will help to create a more resilient and transparent financial system.”

John C. Williams, President of the Federal Reserve Bank of New York and Co-Chair of the FSB’s Official Sector Steering Group said, “In these final months until no new LIBOR, remember: we never want to repeat this transition again. So for the sake of global financial stability, choose robust, enduring reference rates. For US dollar LIBOR, that means building the transition on an unshakable SOFR foundation.”

Notes to editors

The FSB set out in 2014 a series of recommendations for strengthening key interbank offered rates (IBORs) in the unsecured lending markets, and for promoting the development and adoption of alternative nearly risk-free reference rates, where appropriate. The FSB and member authorities, through the FSB Official Sector Steering Group (OSSG) co-chaired by Andrew Bailey (Governor, Bank of England) and John C. Williams (President and CEO, Federal Reserve Bank of New York), are working to implement and monitor these recommendations.

In June 2021, the FSB issued a set of documents that outlined recommendations for financial and non-financial firms, as well as authorities, to consider to ensure an orderly transition way from LIBOR by end-2021.

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, Vice Chairman, 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.

Guidance on proliferation financing risk assessment and mitigation

30 June 2021

View the Standard

In October 2020, the FATF revised its Standards (Recommendation 1 and its Interpretive Note) to require countries, financial institutions, designated non-financial businesses and professions (DNFBPs) and virtual asset service providers (VASPs) to identify, assess, understand and mitigate their proliferation financing risks. The FATF Guidance on Proliferation Financing Risk Assessment and Mitigation, published in June 2021, aims to help countries, financial institutions, DNFBPs and VASPs effectively implement these new FATF requirements.

The Guidance benefited from engagement with various stakeholders and reflects the input from a public consultation in March 2021. It explains how both public and private sectors should conduct risk assessments in the context of proliferation financing, and how they can mitigate the risks they identify. It provides an updated list of indicators of the potential breach, non-implementation or evasion of proliferation financing targeted financial sanctions.

The Guidance includes advice to supervisors and self-regulatory bodies responsible for ensuring that proliferation financing risks are being properly assessed and mitigated. The Guidance emphasises the need for supervisors, financial institutions, and other relevant entities to apply the new obligations in a manner that is proportionate to the risks identified, in order to avoid contributing to de-risking or financial exclusion.

Policy proposals to enhance money market fund resilience: Consultation Report

| PDF full text (1 MB)

Enhancing MMF resilience will help address systemic risks and minimise the need for future extraordinary central bank interventions to support the sector.

Summary of document history

Summary of document history

Enhancing MMF resilience will help address systemic risks and minimise the need for future extraordinary central bank interventions to support the sector.

The FSB’s holistic review of the March 2020 market turmoil highlighted structural vulnerabilities in MMFs and related stress in short-term funding markets. MMFs are susceptible to sudden and disruptive redemptions, and they may face challenges in selling assets, particularly under stressed conditions. These features can make individual MMFs, or even the entire MMF sector, susceptible to runs, and may also give rise to system-wide vulnerabilities.

The policy options in the report aim to address these vulnerabilities and are intended to inform jurisdiction-specific reforms and any necessary adjustments to the policy recommendations for MMFs issued by the International Organization of Securities Commissions (IOSCO). Enhancing MMF resilience will help address systemic risks and minimise the need for future extraordinary central bank interventions to support the sector.

The policy options are grouped according to the main mechanism through which they aim to enhance MMF resilience – namely, to: impose on redeeming investors the cost of their redemptions; absorb losses; reduce threshold effects; and reduce liquidity transformation. The report assesses the likely effects of each option on the behaviour of MMF investors, fund managers and sponsors, as well as their implications for the underlying markets,

The consultation report also sets out considerations on how different policy options could be selected and combined to address all the vulnerabilities arising from different types of MMFs. The optimal combination should take account of jurisdiction-specific circumstances and policy priorities, as well as cross-border considerations including to prevent regulatory arbitrage that could arise from adopting divergent approaches across jurisdictions.

Policies aimed at enhancing the resilience of MMFs could be accompanied by additional reforms in two areas: (i) policies to support robust risk management by fund managers and risk monitoring by authorities; and (ii) measures to improve the functioning of the underlying short-term funding markets.

Responses to the public consultation should be sent to [email protected] by 16 August with “MMF policy proposals” in the subject line. All responses will be published on the FSB website unless respondents request otherwise. The final report will be published in October 2021.