Corporate governance: a building block for financial resilience

12 June 2019

2019 FSB Roundtable on External Audit

7 June 2019

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Ref no: 24/2019

The Financial Stability Board (FSB) held the latest in a series of roundtables on External Audit (“the Roundtable”) in Toronto on 6-7 June, hosted by Canada’s Office of the Superintendent of Financial Institutions (OSFI), and chaired by Superintendent Jeremy Rudin. The objective of the Roundtable was to engage in constructive dialogue regarding ways to promote international financial stability by enhancing public confidence in auditors and the quality of audits, especially for systemically important financial institutions.

Roundtable participants comprised senior representatives from FSB members, including national prudential authorities, market regulators and audit oversight bodies, the International Forum of Independent Audit Regulators (IFIAR), the international auditing standard-setter and the six largest global audit networks (“the global networks”).

In the context of the Roundtable’s objective, the following areas were considered:

  • The recurrence, level and root causes of audit inspection findings identified by IFIAR members in their individual inspections of audit firms affiliated with the global networks;

  • Observations from initial audits of expected credit loss estimates under IFRS 9, including the audit work needed to assess the related governance and controls, management judgments and assumptions, and the resulting presentation and disclosures;

  • The global networks’ progress in preparing for the implementation of IFRS 17 and the related audits;

  • Support for IFIAR in promoting collaboration in regulatory activity to foster the effectiveness of audit oversight globally;

  • Effective avenues to strengthen the dialogue between the official sector and the global networks, as a means to inform strong financial sector policies to advance audit quality and promote international financial stability;

  • Characteristics of audit services, particularly for financial statement audits of systemically important financial institutions, and the potential implications for the role of financial reporting in international financial stability; and

  • The importance of a robust and proactive approach by the global networks in continuing to improve audit quality.

The Roundtable’s chair will report the outcomes of the Roundtable to the FSB’s Standing Committee on Supervisory and Regulatory Cooperation.

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.

Since 2012, the FSB has regularly held roundtables with key parties involved in advancing audit quality, including representatives of the global audit networks and IFIAR.

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

IFIAR was established in 2006, with the mission to serve the public interest, including investors, by enhancing audit oversight globally. It comprises independent audit regulators from 55 jurisdictions. For further information on IFIAR, visit www.ifiar.org.

IFRS 9 is the international financial reporting standard that addresses the accounting for financial instruments. It was published in July 2014, and became effective on 1 January 2018. It introduces a new expected credit loss model for the recognition of credit impairment.

IFRS 17 is the international financial reporting standard that addresses the accounting for insurance contracts. It was published in May 2017. In November 2018, the International Accounting Standards Board (IASB) proposed to postpone its effective application date to 1 January 2022.

Evaluation of the effects of financial regulatory reforms on small and medium-sized enterprise (SME) financing: Technical Appendix to the empirical analysis

Evaluation of the effects of financial regulatory reforms on small and medium-sized enterprise (SME) financing: Consultation report

| PDF full text (2 MB)

Summary of document history

Summary of document history

This public consultation on an evaluation of financing for small and medium-sized enterprises (SMEs) is part of a broader examination of the effects of the G20 regulatory reforms on financial intermediation. It was delivered to G20 Finance Ministers and Central Bank Governors for their meeting in Fukuoka on 8-9 June.

This evaluation examines the effects of the post-crisis financial regulatory reforms on the financing of SMEs. As part of a broader FSB examination of the effects of the G20 regulatory reforms on financial intermediation, it is motivated by the need to better understand the effects of the reforms on the financing of real economic activity and their contribution to the G20 objective of strong, sustainable, balanced and inclusive economic growth.

For the reforms that are within the scope of this evaluation, the analysis thus far does not identify material and persistent negative effects on SME financing in general, although there is some differentiation across jurisdictions. There is some evidence that the more stringent risk-based capital requirements under Basel III slowed the pace and in some jurisdictions tightened the conditions of SME lending at those banks that were least capitalised ex ante relative to other banks. These effects are not homogeneous across jurisdictions and they are generally found to be temporary. The evaluation also provides some evidence for a reallocation of bank lending towards more creditworthy firms after the introduction of reforms, but this effect is not specific to SMEs.

SME lending growth has resumed in recent years, although volumes remain below the pre-crisis level in some jurisdictions. Access to external finance for SMEs also appears to have improved, particularly in advanced economies. Stakeholder feedback suggests that SME financing trends are largely driven by factors other than financial regulation, such as public policies and macroeconomic conditions.

Any potential costs found in this evaluation, which appear limited and transitory, should be framed against the wider financial stability benefits of the G20 reforms estimated in ex ante impact assessments. These studies generally found significant net overall benefits in terms of reducing the likelihood and severity (lost output) of financial crisesThe final report will be published in November 2019.

Responses to this public consultation should be sent to [email protected] by Wednesday 7 August 2019. Respondents are encouraged to use this template to submit their response. All responses will be published on the FSB website unless respondents expressly request otherwise. The final report will be published in November 2019.

FSB publishes consultation on SME financing evaluation

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Ref no: 23/2019

The Financial Stability Board (FSB) today released for public consultation an Evaluation of the effects of financial regulatory reforms on small and medium-sized enterprise (SME) financing. The evaluation has been delivered to G20 Finance Ministers and Central Bank Governors for their meeting in Fukuoka on 8-9 June.

This evaluation examines the effects of the post-crisis financial regulatory reforms on the financing of SMEs. As part of a broader FSB examination of the effects of the G20 regulatory reforms on financial intermediation, it is motivated by the need to better understand the effects of the reforms on the financing of real economic activity and their contribution to the G20 objective of strong, sustainable, balanced and inclusive economic growth.

For the reforms that are within the scope of this evaluation, the analysis thus far does not identify material and persistent negative effects on SME financing in general, although there is some differentiation across jurisdictions. There is some evidence that the more stringent risk-based capital requirements under Basel III slowed the pace and in some jurisdictions tightened the conditions of SME lending at those banks that were least capitalised ex ante relative to other banks. These effects are not homogeneous across jurisdictions and they are generally found to be temporary. The evaluation also provides some evidence for a reallocation of bank lending towards more creditworthy firms after the introduction of reforms, but this effect is not specific to SMEs.

SME lending growth has resumed in recent years, although volumes remain below the pre-crisis level in some jurisdictions. Access to external finance for SMEs also appears to have improved, particularly in advanced economies. Stakeholder feedback suggests that SME financing trends are largely driven by factors other than financial regulation, such as public policies and macroeconomic conditions.

Any potential costs found in this evaluation, which appear limited and transitory, should be framed against the wider financial stability benefits of the G20 reforms estimated in ex ante impact assessments. These studies generally found significant net overall benefits in terms of reducing the likelihood and severity (lost output) of financial crises.

Responses to this public consultation should be sent to [email protected] by Wednesday 7 August 2019. Respondents are encouraged to use this template to submit their response. All responses will be published on the FSB website unless respondents expressly request otherwise. The final report will be published in November 2019.

Notes to editors

The evaluation draws on a broad range of information sources and is based on various types of analyses and extensive stakeholder feedback. These include responses to a questionnaire by FSB jurisdictions; input from stakeholders (SMEs, market participants, trade associations, think-tanks and academics) through a roundtable, a call for public feedback and interviews with market participants in FSB jurisdictions; a review of the literature; and empirical analysis using data from commercial providers and FSB member authorities.

The evaluation was undertaken using the FSB’s framework for the post-implementation evaluation of the effects of the G20 financial regulatory reforms. The framework guides analyses of whether the G20 reforms are achieving their intended outcomes, and helps identify any material unintended consequences that may have to be addressed, without compromising on the objectives of the reforms. This is the third evaluation under the FSB framework; the FSB recently launched a call for public feedback on the fourth evaluation, on the effects of too-big-to-fail reforms for systemically important banks, which will be completed in 2020.

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

Decentralised financial technologies: Report on financial stability, regulatory and governance implications

6 June 2019 | PDF full text (635 KB)

This report considers the financial stability, regulatory and governance implications of the use of decentralised financial technologies such as those involving distributed ledgers and online peer-to-peer, or user-matching, platforms.

The report focuses on technologies that may reduce or eliminate the need for intermediaries or centralised processes that have traditionally been involved in the provision of financial services. Such decentralisation generally takes one of three broad forms: the decentralisation of decision-making, risk-taking and/or record-keeping. These decentralised technologies could be applied in a number of areas, including cross-border payments and settlements, the tokenisation of securitises, trade finance and insurance and peer-to-peer lending.

The report notes that the application of decentralised financial technologies – and the more decentralised financial system to which they may give rise – could benefit financial stability in some ways. It may also lead to greater competition and diversity in the financial system and reduce the systemic importance of some existing entities. At the same time, the use of decentralised technologies may entail risks to financial stability. These include the emergence of concentrations in the ownership and operation of key infrastructure and technology, as well as a possible greater degree of procyclicality in decentralised risk-taking. New uncertainties concerning the determination of legal liability and consumer protection may also affect public trust in the financial system. Recovery and resolution of decentralised structures may be more difficult.

These issues may pose challenges for financial regulatory and supervisory frameworks. A more decentralised financial system may reinforce the importance of an activity-based approach to regulation, particularly where it delivers financial services that are difficult to link to specific entities and/or jurisdictions. Certain technologies may also challenge the technology-neutral approach to regulation taken by some authorities.

These concerns could continue to be the subject of further consideration by authorities. Regulators may also wish to engage in further dialogue with a wider group of stakeholders, including those in the technology sector that have had limited interaction with financial regulators to date. This should help avoid the emergence of unforeseen complications in the design of decentralised financial technologies at a later stage.

The report was delivered to G20 Finance Ministers and Central Bank Governors for their meeting in Fukuoka on 8-9 June.

FSB report considers implications of decentralised financial technologies

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Ref no: 22/2019

The Financial Stability Board (FSB) today published a report on Decentralised financial technologies. This report considers the financial stability, regulatory and governance implications of the use of decentralised financial technologies such as those involving distributed ledgers and online peer-to-peer, or user-matching, platforms. The report has been delivered to G20 Finance Ministers and Central Bank Governors for their meeting in Fukuoka on 8-9 June, which includes a High-Level Seminar on Financial Innovation.

The report focuses on technologies that may reduce or eliminate the need for intermediaries or centralised processes that have traditionally been involved in the provision of financial services. Such decentralisation generally takes one of three broad forms: the decentralisation of decision-making, risk-taking or record-keeping. There are already examples emerging of decentralisation in payments and settlement, capital markets, trade finance and lending.

The report notes that the application of decentralised financial technologies – and the more decentralised financial system to which they may give rise – could benefit financial stability in some ways. It may also lead to greater competition and diversity in the financial system and reduce the systemic importance of some existing entities. At the same time, the use of decentralised technologies may entail risks to financial stability. These include the emergence of concentrations in the ownership and operation of key infrastructure and technology, as well as a possible greater degree of procyclicality in decentralised risk-taking. New uncertainties concerning the determination of legal liability and consumer protection may also affect public trust in the financial system. Recovery and resolution of decentralised structures may be more difficult.

These issues may pose challenges for financial regulatory and supervisory frameworks, particularly those that currently focus on centralised financial institutions. A more decentralised financial system may reinforce the importance of an activity-based approach to regulation, particularly where it delivers financial services that are difficult to link to specific entities and/or jurisdictions. Certain technologies may also challenge the technology-neutral approach to regulation taken by some authorities. These concerns could continue to be the subject of further consideration by authorities. Regulators may also wish to engage in further dialogue with a wider group of stakeholders, including those in the technology sector that have had limited interaction with financial regulators to date. This should help avoid the emergence of unforeseen complications in the design of decentralised financial technologies at a later stage.

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

Task Force on Climate-related Financial Disclosures: 2019 Status Report

5 June 2019 | PDF full text (8 MB)

This is the second status report on adoption of the Task Force for Climate-related Financial Disclosures (TCFD) has delivered to the FSB. The Status Report provides an overview of the extent to which companies in their 2018 reports included information aligned with the core TCFD recommendations published in June 2017.

To better understand current climate-related financial disclosure practices and how they have evolved, the Task Force reviewed reports for over 1,100 companies from 142 countries in eight industries over a three-year period. In addition, the Task Force conducted a survey on companies’ efforts to implement the TCFD recommendations as well as users’ views on the usefulness of climate-related financial disclosures for decision-making. While the Task Force found some of the results of its disclosure review and survey encouraging, it has concerns that not enough companies are disclosing decision-useful climate-related financial information.

The Task Force reviewed financial filings, annual reports, integrated reports, and sustainability reports. It found that:

  • Disclosure of climate-related financial information has increased since 2016, but is still insufficient for investors.

  • More clarity is needed on the potential financial impact of climate-related issues on companies.

  • Of companies using scenarios, the majority do not disclose information on the resilience of their strategies.

  • Mainstreaming climate-related issues requires the involvement of multiple functions.

The FSB has asked the TCFD to deliver another status report to the FSB in September 2020. The TCFD will undertake further work during the course of the next year to promote and monitor adoption of the TCFD recommendations. The Task Force is considering additional work to: (i) clarify elements of the TCFD’s supplemental guidance, (ii) develop process guidance around how to introduce and conduct climate-related scenario analysis, and (iii) identify business-relevant and accessible climate-related scenarios.

TCFD report finds encouraging progress on climate-related financial disclosure, but also need for further progress to consider financial risks

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Ref no: 21/2019

The Financial Stability Board (FSB) welcomed the publication today of the 2019 Status Report by the industry-led Task Force on Climate-related Financial Disclosures (TCFD). The Status Report provides an overview of the extent to which companies in their 2018 reports included information aligned with the core TCFD recommendations published in June 2017.

To better understand current climate-related financial disclosure practices and how they have evolved, the Task Force reviewed reports for over 1,100 companies from 142 countries in eight industries over a three-year period. In addition, the Task Force conducted a survey on companies’ efforts to implement the TCFD recommendations as well as users’ views on the usefulness of climate-related financial disclosures for decision-making. While the Task Force found some of the results of its disclosure review and survey encouraging, it has concerns that not enough companies are disclosing decision-useful climate-related financial information.

The Task Force reviewed financial filings, annual reports, integrated reports, and sustainability reports. It found that:

  • Disclosure of climate-related financial information has increased since 2016, but is still insufficient for investors.

  • More clarity is needed on the potential financial impact of climate-related issues on companies.

  • Of companies using scenarios, the majority do not disclose information on the resilience of their strategies.

  • Mainstreaming climate-related issues requires the involvement of multiple functions.

FSB Chair Randal K. Quarles said that: “The Task Force continues to provide a forum for market participants to develop and use a valuable private-sector solution to assess climate-related business risks. The increased participation levels confirm the value of these voluntary disclosures, allowing the public, markets, and investors to better monitor risks.”

Michael R. Bloomberg, Chair of the TCFD said: “We remain encouraged by the continued growth in the number of companies adhering to the guidelines of the TCFD – it means businesses are better informed about the risks they face, and investors are more capable of making sound decisions. However, we’re also clear-eyed about the serious threat that climate change poses. In order to keep people out of harm’s way, and build a more resilient global economy, we need more companies to follow their lead – and soon.”

A total of 785 organisations are now supporters of the TCFD, including the world’s largest banks, asset managers and pension funds, responsible for assets of $118 trillion.

The FSB has asked the TCFD to deliver another status report to the FSB in September 2020. The TCFD will undertake further work during the course of the next year to promote and monitor adoption of the TCFD recommendations. The Task Force is considering additional work to: (i) clarify elements of the TCFD’s supplemental guidance, (ii) develop process guidance around how to introduce and conduct climate-related scenario analysis, and (iii) identify business-relevant and accessible climate-related scenarios.

Notes to editors

The TCFD was established by the FSB in December 2015 to develop a set of voluntary, consistent disclosure recommendations for use by companies in providing information to investors, lenders and insurance underwriters about their climate-related financial risks. The members of the Task Force are drawn from a wide range of industries and countries across the globe.

The Task Force published its recommendations in June 2017 after extensive public engagement and consultation. The TCFD developed 11 recommendations on climate-related financial disclosures that are applicable to organisations across sectors and jurisdictions. The recommendations are structured around four thematic areas:

  • Governance: The organisation’s governance around climate-related risks and opportunities.

  • Strategy: The actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning.

  • Risk Management: The processes used by the organisation to identify, assess and manage climate-related risks.

  • Metrics and Targets: The metrics and targets used to assess and manage relevant climate-related risks and opportunities.

More information on the work of the Task Force, and companies’ statements of support, are available on the TCFD website.

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

FSB Report on Market Fragmentation

4 June 2019 | PDF full text (791 KB)

This report, which was delivered to G20 Finance Ministers and Central Bank Governors ahead of their meetings in Fukuoka on 8-9 June, sets out the conclusions from the FSB’s work on market fragmentation and identifies several areas for further work to address it.

The report looks at some examples of financial activities where supervisory practices and regulatory policies may give rise to market fragmentation. It discusses potential trade-offs that authorities have considered between the benefits of increased cross-border activity and a need to tailor domestic regulatory frameworks to local conditions and mandates. The areas the report examines are the trading and clearing of over-the-counter (OTC) derivatives across borders; banks’ cross-border management of capital and liquidity; and the sharing of data and other information internationally.

The report lays out approaches and mechanisms that may enhance the effectiveness and efficiency of international cooperation, and help to mitigate any negative effects of market fragmentation on financial stability.

On this basis, the report identifies several areas for further work to address market fragmentation. These focus on facilitating further analysis and discussion of approaches and mechanisms for more efficient and effective cross-border cooperation amongst authorities. Such areas for further work include: exploring ways to, where justified, enhance the clarity of deference processes in derivatives markets; strengthening the understanding of approaches by supervisory and resolution authorities towards pre-positioning of capital and liquidity by international banks; considering ways to enhance supervisory communication and information sharing, including approaches and mechanisms to avoid future fragmentation; and considering whether there is evidence of market fragmentation with observed consequences for financial stability as part of the FSB’s ongoing evaluation of the effects of too-big-to-fail reforms.