FSB Addresses the Financial Stability Implications Of COVID-19

The Financial Stability Board (FSB) released a report on international cooperation and coordination to address the financial stability implications of COVID-19.

16 April, 2020 | AtoZ Markets – FSB is a G20 supervisory body that oversees and makes recommendations to the global financial system. The supervisory body has released a report that outlines the financial stability implications and policy measures of the coronavirus pandemic. A global recession seems imminent following the COVID-19 epidemic, but the post-financial crisis reforms are helping to mitigate the impact. The reforms have made the global financial system better to support funding in the current crisis, the report said.

COVID-19 Represents Biggest Challenge to Markets Since GFC

According to the international body, COVID-19 represents the biggest test for the financial markets since the global financial crisis (GFC). However, the FSB believes that markets are now more resilient and better able to cope with the pandemic thanks to G20 regulatory reforms.

In particular, the FSB report sets out five principles. These will promote a rapid and coordinated response to support the real economy while maintaining financial stability and minimizing risk. They are:

  1. Monitor and share information on a timely basis to assess and address financial stability risks from pandemic; 
  2. Recognize and use the flexibility built into existing financial standards to support our response;
  3. Explore the possibilities of temporarily reducing the operating costs weighing on businesses and the authorities;
  4. Act under international standards, and not go back on reforms or compromise the objectives underlying existing international standards;
  5. And coordinate the future development of temporary measures taken.

The report warns that specific sectors of the world economy may face permanent reductions in their activities. It noted that as the pandemic continues, non-financial corporations are facing increasing funding deficits as cash flows from operations decrease or dry up.

The report also warns that the execution of complex market operations by financial institutions can be hampered because workers work from home and by other activities at separate sites.

The report says that the related financial dangers deserve special attention. It includes high levels of private and public sector debt, high asset prices and greater interconnection between banks and other institutions.

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FSB Is Closely Monitoring Market Resilience Amid COVID-19

The FSB closely monitors the resilience of critical nodes in the financial system that are essential to financial stability. These also include:

  • Financial institutions and markets to channel funds to the real economy;
  • Market participants around the world to obtain financing in us dollars, in particular in emerging markets;
  • Financial intermediaries, such as investment funds, to effectively manage liquidity risk; 
  • Market participants and financial market infrastructures (including central counterparties) to manage evolving counterparty risks.

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