Studies and reports with recommendations about how to deal with the overall impact of the coronavirus crisis on the international banking community, particularly via non-bank financial intermediaries (NBFIs), are forthcoming over the next several months, the top supervisor for the Federal Reserve – and the chair of the international group focusing on financial stability – said Tuesday.
In remarks via webcast before the Peterson Institute for International Economics in Washington, D.C., Fed Board Vice Chair for Supervision Randal Quarles outlined the 2021 work plan for the international group, the Financial Stability Board (FSB), which he chairs. The group is made up of central bankers and financial agency leaders from the top 20 democracies worldwide.
Quarles told the group that in July the FSB that will set out “consequential policy proposals” to improve money market mutual fund (MMF) resilience. Quarles asserted that the “extremely high demand” for liquidity when the financial impact of the coronavirus became apparent in March 2020, combined with a flight-to-safety, triggered a “dash for cash” – primarily by NBFIs — that hit institutional prime money market funds particularly hard.
He said that was the second time in about a decade that destabilizing runs on MMFs occurred. “More concerning this time, however, is that we had taken steps between these events precisely to reduce the likelihood of such runs,” he said.
The coming proposals should also, he said, reduce the likelihood that government interventions and taxpayer support will be needed to halt future MMF runs. “This work will also consider the relationship between MMFs and short-term funding markets, with a particular focus on commercial paper and certificate of deposit markets and the impact of dealer behavior,” he said.
Quarles said continued work on other open-end funds, margining and bond market structure, and liquidity will follow the MMF proposals, starting with enhancing understanding of vulnerabilities that could emanate from these sectors, including risk transmission channels. “Addressing systemic risk in a dynamic sector that continues to evolve is no small feat,” Quarles proclaimed. “I expect policy-related discussions and recommendations to follow the analytical work, though that will likely extend past this year.”
The Fed vice chair further noted that disruptions in bond markets also “raised questions about the role of leveraged investors and the willingness and capacity of dealers to intermediate in times of stress.” He said “work is underway” to gather data and analyze dealer behavior to develop a comprehensive view on their impact on financial market functioning and determine whether policy responses are necessary.
In other comments, Quarles said:
- The March 2021 market turmoil showed how central counterparties (CCPs) demonstrated resilience. He said the FSB will focus on improving CCP resilience and resolvability, with a “workstream” planned for this year aimed at doing just that in default and non-default scenarios – including “assessing whether any new types of resources would be necessary to enhance CCP resolvability.”
- A final set of targets on cross-border payments will be published in May, based on work by an FSB committee, that will set the tone and pace for work that follows. Quarles called these “among the most important deliverables the FSB will complete” in 2021.
- Key considerations involved in amending or unwinding COVID-19 support measures, as appropriate, will be outlined in a report next month. “The FSB will play an important role once unwinding measures begin, given its work to support international information sharing on COVID-19 policy responses,” Quarles said. “The FSB also plans to assess initial lessons learned from the COVID event for financial stability and share them with the G20 in July.”
- Greater convergence in regulatory reporting of cyber incidents will be delivered to the G20 in October.
- An evaluation of the effects of post-global financial crisis (GFC) banking reforms will be published next month as well. Quarler said the evaluation’s report on too-big-to-fail (TBTF) reforms is the FSB’s most analytically rigorous evaluation ever. “When looking at these reforms, indicators of systemic risk and moral hazard moved in the right direction, and effective TBTF reforms seem to have brought net benefits,” he said. “In fact, at the beginning of the COVID event, we observed a far more resilient banking sector than that which entered the 2008 crisis.”
- LIBOR transition on-going progress, including supervisory issues, will be the subject of a report sometime this year. LIBOR is expected to end, at least for new contracts, by year’s end.