Recent bouts of financial market turmoil are raising concerns about systemic risk, warns the Financial Stability Board (FSB) — highlighting the need for regulatory vigilance and international coordination.
Ahead of a meeting of the G20 finance ministers and central bankers, Klaas Knot, outgoing FSB chair of the international body, called for continued reform efforts and cooperation to bolster the resilience of the global financial system.
In his final letter to the G20 as chair of the FSB, Knot said, “The global risk outlook has become more challenging amid increased trade and economic policy uncertainty.”
While financial markets have continued to function amid the intensified volatility, it’s important for regulators, policymakers, and industry firms, to remain alert to emerging risks, it said — noting that stress in the banking sector in early 2023, and the financial market disruptions that accompanied the onset of the pandemic “demonstrated that vulnerabilities can unravel quickly and unexpectedly in the face of adverse shocks.”
“These events reinforced the importance of vigilance, proactive policy responses and international cooperation to maintain global financial stability,” it said.
For now, the FSB “is closely monitoring market developments and stands ready to act, as necessary,” it said.
At the same time, the FSB will also continue working to enhance its data on markets to enhance its ability to monitor for emerging risks, which “is a critical part of our mandate,” it said.
To that end, the group is “exploring ways to address data challenges that would help support authorities’ risk monitoring, the design and implementation of policy measures, and cross-border cooperation for sharing information,” it said.
In particular, the FSB is focused on the non-bank financial sector — where there are ongoing efforts to address concerns about liquidity mismatches among investment funds, to enhance the resilience of money market funds, and to improve margining practices.
In July, the group will provide the G20 with policy recommendations to address financial stability risks arising from leverage in the shadow banking sector.
“Implementation of these policies is critical to enhance the resilience of the [non-bank] sector,” it said. “Only a resilient financial system is able to provide funding to corporates and households, even during times of stress, and subsequently support economic growth.”
Longer term, the financial system is being transformed by its growing reliance on technology, it also noted.
“The FSB’s work in this area has focused on ensuring that supervisory and regulatory frameworks and approaches provide a solid foundation for harnessing the benefits of such innovation while containing their risks,” it said — pointing to its efforts to address the risks posed by the emerging crypto sector, ever-growing cyber risks, and the increased use of AI in financial markets.
“We are also continuing to deepen our analysis of the financial stability implications from the increasing use of artificial intelligence in the financial sector and will deliver a report to the G20 on this topic in October,” it noted.
Knot, president of De Nederlandsche Bank, will be replaced as chair of the FSB by Andrew Bailey, governor of the Bank of England, on July 1, for a three-year term.