Vulnerabilities through non-bank financial intermediation at top of supervision priorities for international group

Non-bank financial intermediation remains at the top of the supervision priority list for international banking regulators because of the urgency to address vulnerabilities, the chairman of the group said Monday.

In remarks to the third conference on financial stability in Madrid, Spain, Financial Stability Board (FSB) Chair Randal Quarles said the board’s policy proposals for enhancing money market fund resilience “give jurisdictions a good start on assessing and addressing vulnerabilities in their jurisdictions.” He said other areas, such as short-term funding markets, open-ended funds, and margin requirements, also require further assessment. “The FSB is actively engaged in work in each of those areas,” he added.

Quarles is a member of the Federal Reserve Board. His term as board vice chair for supervision officially ended last week (and his bio information on the Fed’s website indicates he has shed the title of “Vice Chair for Supervision,” which the bio notes his term in that role ended on Oct. 13). His term as chair of the FSB ends in December.

In other comments, Quarles indicated to the group that climate-related financial risk is a risk to financial stability that is “less well understood.”

“Although there is a vast amount of international work ongoing in this area, there remains much to learn about the climate-related complexities outside the financial system as well as within it,” Quarles said. “In light of the increasing amount of international work related to climate, the FSB has developed for the G20 a roadmap to help guide global efforts to understand and address the financial risks from climate change.”

He said progress on the FSB’s climate roadmap will “depend on the collective efforts of the FSB, its membership of national authorities, and international organizations. It sets out in one place the way forward on disclosures, data, vulnerabilities analysis, and regulatory and supervisory approaches.”

He said that the FSB is closely watching cryptoassets and stablecoins, particularly in light of their growth over the last 18 months. He reported that, in that time, cryptoassets’ market capitalization has grown from less than $200 billion to as much as $2.4 trillion. Stablecoins, he said, have increased from less than $10 billion in market cap to more than $130 billion. He said in October 2020, the FSB released high-level recommendations for the regulation, supervision, and oversight of global stablecoin arrangements.

“Technology and innovation continue to advance rapidly,” he said. “We need to be mindful of whether our regulatory and supervisory approaches appropriately address risks while preserving the benefits that innovation can bring. As these continue to develop, we continue to explore difficult questions. Are these digital assets currencies? Or securities? Deposits? They don’t fit neatly into our regulatory buckets, and they operate in the digital ether where they can easily cross national borders.”

Regarding the coronavirus crisis (which he calls the “COVID event”), Quarles said he has found banks’ apparent reluctance to use buffers “an interesting lesson from the COVID event.”

“Some evidence suggests that banks may have been hesitant to use their regulatory capital buffers to meet credit demand (despite the stated intent from supervisors that banks should use their buffers under stress),” he said. “This may be due to uncertainty regarding potential future losses or the wider market stigma that may result if a bank were to use its buffers. Perhaps the extensive fiscal and monetary support provided to borrowers averted banks’ need to use buffers.”

He added that future research into that perceived reluctance will be important “so that we can improve our macro- and micro-prudential tools for the next time we need them.”

Federal Reserve Board Gov. Randal Quarles: Financial Stability and Coordination in Times of Crisis