Overview and key messages
The COVID-19 pandemic represents the biggest test of the post-crisis financial system to date. The pandemic constitutes an unprecedented global macro-economic shock, pushing the global economy into a recession of uncertain magnitude and duration. The global financial system faces the dual challenge to sustain the flow of credit amidst declining growth and to manage heightened risks.
This exogenous shock has placed the financial system under strain. Downward revisions of expected economic activity and heightened risk aversion have led to a major re-pricing and re- positioning in global financial markets. On the one hand, the providers of funding have an increasing preference for short-term safe assets. On the other hand, credit risks are rising sharply. As a consequence, the demands on the financial system’s capital and liquidity have risen. Heightened operational risks are adding to vulnerabilities.
The global financial system is more resilient and better placed to sustain financing to the real economy as a result of the G20 regulatory reforms in the aftermath of the 2008 global financial crisis. In particular, greater resilience of major banks at the core of the financial system has allowed the system to date largely to absorb rather than amplify the current macroeconomic shock.
Those forms of market-based finance that contributed to the 2008 financial crisis pose significantly lower financial stability risks. Financial market infrastructures, particularly CCPs, have functioned well, despite the challenging external financial and operational conditions.
Nevertheless, given the unprecedented scale of the shock, key funding markets experienced acute stress and authorities needed to take a wide range of measures to sustain the supply of credit to the real economy and to support financial intermediation. The actions taken have been determined and bold, including large-scale central bank liquidity support.
However, continued uncertainty about the scale and duration of the economic impact of the pandemic continues to pose strains on the financial system. Internationally coordinated action to support a well- functioning, resilient financial system and well-functioning and open markets remains a priority. The FSB is closely monitoring the resilience of the financial system, in particular key nodes in the system that are critical for financial stability.
These include: the ability of financial institutions and markets to channel funds to the real economy; the ability of market participants around the world to obtain US dollar funding, particularly in emerging markets; the ability of financial intermediaries, such as investment funds, to effectively manage liquidity risk; and the ability of market participants and financial market infrastructures (including CCPs) to manage evolving counterparty risks.
Weaknesses in these nodes, and their interaction, could tighten financial conditions, and could impact the provision of financial services and potentially the stability of the financial system. The official sector community is providing a rapid and coordinated response to support the real economy, maintain financial stability and minimise the risk of market fragmentation. This response is underpinned by the following principles:
Authorities will, individually and collectively through the FSB and standard-setting bodies (SSBs), monitor and share information on a timely basis to assess and address financial stability risks from COVID-19, so as to maximise the benefit of a global policy response.
Authorities recognise, and will make use of, the flexibility built into existing financial standards – including through the use of firm-specific and macroprudential buffers – to sustain the supply of financing to the real economy, to support market functioning and to accommodate robust business continuity planning.
The FSB, SSBs and authorities will continue to seek opportunities to temporarily reduce operational burdens on firms and authorities, so as to assist them in focusing on COVID-19 response. This includes, for instance, delaying implementation deadlines, reprioritising timetables for initiatives in other policy areas, or providing flexibility in technical compliance rules.
Authorities’ actions will be consistent with maintaining common international standards, given that these provide the resilience needed to sustain lending to the real economy, and preserve an international level playing field. Such actions will not roll back regulatory reforms or compromise the underlying objectives of existing international standards.
Authorities will coordinate through the FSB and SSBs the future timely unwinding of the temporary measures taken, to assist in returning financial conditions and firms’ operations to normal in a smooth and consistent manner and to maintain financial stability in the longer term.
On this basis, the FSB is supporting international cooperation and coordination on the COVID- 19 response in three ways. First, the FSB is regularly sharing information among financial authorities on evolving financial stability threats, on the policy measures that financial authorities are taking or are considering, and on the effects of those policies.
Second, the FSB is assessing potential vulnerabilities, including in the key nodes described above, in order to better understand the impacts of COVID-19 on financial markets in individual jurisdictions and across the globe and inform discussions of policy issues. Third, FSB members are coordinating on their responses to policy issues, including measures that SSBs and national authorities take to provide flexibility within international standards or reduce operational burdens.
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