investment risk / gremlin

While the global economy and financial system has handled the high inflation and high interest rate environment so far, risks continue to lurk, the Financial Stability Board (FSB) warns.

Ahead of the G20’s upcoming summit, the FSB sent a letter to the G20 leaders highlighting the ongoing threat posed by high rates and slowing economic growth, which could drive rising credit losses amid historically high global debt levels.

The group called on regulators to closely monitor asset quality, particularly in interest-sensitive sectors such as real estate, as “higher debt servicing costs continue to permeate the economy.”

“At the same time, the financial system is in the midst of deep structural change, including the need to respond to accelerating digitalization and to climate change risks,” it said.

Additionally, the letter highlights concerns about the build-up of leverage in the shadow banking sector.

Given those concerns, the FSB said that addressing financial stability risks arising from leverage in shadow banking will be a “major focus” of its policy work next year.

The board has called for work to “significantly strengthen liquidity management” by fund managers and said that policy work to “reduce the procyclicality of margining practices and to enhance liquidity preparedness for margin and collateral calls is well underway.”

“These two sets of policies aim to reduce excessive and potentially destabilizing spikes in liquidity demand during times of stress,” it said.

The FSB also noted that the strains in the U.S. banking sector, which arose in the spring, “exposed vulnerabilities” including poor liquidity and interest rate risk management and governance at certain financial institutions, which “reinforced the need for strong and effective supervision.”