Quarles: FSB report will identify policy goals to make nonbank sector more resilient

A Financial Stability Board (FSB) report to the G20 Summit next month will give a diagnosis of the financial stability shock related to the coronavirus (COVID-19) pandemic and identify areas for possible policy action, including ways to address vulnerabilities in the nonbank financial intermediation (NBFI) sector, the Federal Reserve’s top supervision official said Tuesday.

Speaking remotely to the Securities Industry and Financial Markets Association Annual Meeting, Fed Vice Chair for Supervision Randal Quarles, who is also chair of the FSB, reiterated that a review of the pandemic’s impact has revealed a banking system that withstood the shock well with “limited” official sector support but a nonbank system that was “significantly more fragile.”

“The shocks related to COVID-19 and the associated containment measures, which I refer to as the ‘COVID Event,’ have sharpened the FSB’s focus on the role of capital provision, the functioning of financial markets, and different aspects of nonbank financial intermediation,” Quarles said.

Quarles reiterated that the FSB’s annual NBFI monitoring report estimates that the sector now accounts for almost 50% percent of total financial intermediation globally, “up sharply in the last decade.” This growth has brought greater interconnectedness, with many NBFIs relying on the banking system for credit and backstop liquidity. “The interconnectedness of our financial system means that it is not enough to understand the vulnerabilities arising from the banking sector,” Quarles said. “We must also understand vulnerabilities in the nonbank sector and how shocks are transmitted to or from the nonbank sector.”

The NBFI sector has changed considerably over the past decade, Quarles noted, with growing diversity among business models and financial services. “New types of markets – for example, private debt markets – and new forms of intermediation, such as fintech credit, have sprung up,” he said. “Investments by nonbank entities in certain credit products, such as fixed income exchange traded funds and collateralized loan obligations, and participation in some credit segments, such as mortgage and consumer finance, has grown. Change is also evident in how the sector operates in different jurisdictions. For example, provision of credit by nonbank fintech lenders varies greatly across FSB member jurisdictions. In sum, nonbanks now play a larger and more diverse role in financing the real economy and managing the savings of households and companies.”

Quarles said addressing vulnerabilities in the financial system going forward “will require a holistic perspective given the various linkages within nonbank financial intermediation and between nonbanks and banks.” The FSB is looking at how to improve the resilience of those areas of the market that needed “significant bolstering,” he said, in order to “provide a clear path forward to strengthen the resilience of the global financial system.”

The Financial Stability Board’s Roadmap for Addressing NBFI Vulnerabilities” – speech by Fed Vice Chair for Supervision Randal K. Quarles at the Securities Industry and Financial Markets Association Annual Meeting (via webcast)