FSB – Issued speech on the financial system after COVID

May 11, 2021 – Considers concept of systemic risk, how financial reforms of the last ten years cushioned Covid’s impact, how to address system weaknesses and improve resilience.

Systemic Risk
The risk that an initial shock may spread through the system to such an extent that healthy and solvent firms and markets are severely affected, may lead to system breakdown. The financial system is more vulnerable to systemic risk than other sectors of the economy. Systemic risk has been the primary ingredient in financial crises throughout history.

Effects of Covid
Stated that bold policy response by governments, central banks, and supervisors helped maintain financial stability and sustain the supply of credit to the economy. Financial system more resilient than 10 years ago due to post-global crisis reforms. Banks have therefore been able to absorb the Covid shock and continue to provide credit. Other areas did not fare so well, including money market funds and open-ended funds. Central banks had to bail out a number of financial markets, but not banks as they had to in 2008.

Future Work
After Covid, there will be work to do, to reduce systemic risk in non-bank markets. FSB to issue a consultation in July 2021 with proposals to improve the resilience of money market funds, will look at the relationship between them and short-term funding markets. Need to look at whether investors see money market funds as equivalent to deposit accounts, and if so, do these funds have the resilience to meet liquidity demands in a crisis. To be followed by efforts focused on other open-ended funds, margining and bond market structure, and liquidity. Work also continues on CCP resilience and resolvability.

For more information, visit www.fsb.org.

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