FSB Says Improving Economy Doesn’t Reduce Need for Strong Banks

The Financial Stability Board said banks and regulators must press on with reforms to safeguard the financial system even as the global economy recovers.

“The improved global outlook does not diminish the need to continue to strengthen financial resilience,” it said in a statement after a meeting in London yesterday led by Chairman Mark Carney.

While the International Monetary Fund sees the world economy growing 3.7 percent this year, it has said there are downside risks, including financial-market volatility in emerging markets. The MCSI Emerging Markets Index has risen 0.6 percent in the past six months, lagging an 8.4 percent advance in the MSCI World Index.

Part of the emerging-market turmoil was related to capital outflows as the Federal Reserve unwound its stimulus program and tensions between Russia and western governments over Ukraine. Emerging market stocks rose yesterday after Fed Chair Janet Yellen signaled that economic support would continue for “some time.”

Financial markets “should be prepared for the possibility of sharp adjustments in interest rates, exchange rates, valuations of financial instruments, market volatility and liquidity,” the FSB said in yesterday’s statement. “Some emerging markets may experience a combination of slower growth, capital outflows and higher borrowing costs which may expose vulnerabilities.”

The FSB also said that it was on course to deliver a package of proposals for tackling too-big-to-fail banks to a November summit of global leaders in Brisbane, Australia.

Structural Reforms

The group’s plans include a probe into “the cross-border impacts and global financial stability implications of structural banking reforms.”

Banks have warned that they face a growing wave of different structural requirements from regulators, ranging from the U.S. Volcker Rule to curb proprietary trading, to the so-called Vickers plans in the U.K. that will require some lenders to separately capitalize their deposit-taking arms.

Proposals put forward earlier this year by Michel Barnier, the EU’s financial services chief, have been criticized by European Parliament legislators as inadequate to deliver a common European approach.

While structural rules “help address the too-big-to-fail problem,” they can also have “impacts on financial institutions and markets in third countries,” the FSB said.

At a press conference yesterday, Carney said the FSB wants lenders and the International Swaps and Derivatives Association Inc., an industry group, to come up with proposals to write temporary pauses into derivatives contracts struck with banks that hit financial trouble.

Lehman Collapse

The measures could prevent the type of turmoil in markets seen with the collapse of Lehman Brothers Holdings Inc in 2008, regulators have said.

There is “no lessening” on the focus on so-called contractual stays in derivatives, said Carney, who is also governor of the Bank of England.

The FSB’s financial regulation plans include a June report on boosting the reliability of financial benchmarks. The board is co-ordinating regulators’ work to identify alternatives to scandal-hit benchmarks such as the London Interbank Offered Rate.

The FSB, a group of global regulators and central bankers, announced in February that it was widening its review to include rates underpinning the foreign exchange markets. The FSB working group on currency benchmarks will make recommendations to the Brisbane summit of G-20 leaders, Carney said.

Other initiatives to be completed by the Brisbane summit include the development of a “basic capital requirement” for insurers, the FSB said.

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