“Episodes of market turmoil and the failure of several banks and non-banks in recent years are a stark reminder that vulnerabilities remain within the global financial system. And as the financial system evolves, new risks are emerging,” wrote FSB chair, Klaas Knot.
“Developing policies is not enough,” said the letter. “A clear challenge at present is that agreed financial reforms have not yet been fully implemented.”
These shortcomings are an issue given the state of the global economy, it noted.
“Against the backdrop of high public and private debt levels and modest GDP growth, the world can ill afford financial instability. We must redouble our combined efforts to ensure a stable global financial system that can finance the economy without recourse to extraordinary support,” the letter said — adding that real progress can only be achieved with political will.
In the banking sector, recent turmoil highlights the need for banks and regulators to be prepared to deal with faster deposit outflows than have happened historically. Previous policy work has pointed to the role of social media and the ease of moving money as having the potential to accelerate bank runs.
“Another take away is the fundamental importance of the soundness of banks’ risk management, governance practices and vigilant supervision. In the coming year, it is important that the key lessons identified from the 2023 bank failures continue to be addressed,” it said.
At the same time, the ongoing shift from the traditional banking sector to the shadow banks has long been a priority for the FSB, which noted, “Non-bank financial intermediation continues to grow, and the sector continues to evolve in ways that change the risks and vulnerabilities that the financial system faces.”
This has led to proposed reforms of liquidity risk management for investment funds, and for money market funds, specifically. In the coming year, the FSB intends to propose measures to, “address financial stability risks stemming from leverage in the non-bank sector.”
“Again, it is not enough to develop policies; one must also implement them effectively,” the letter stressed. “It is critical for jurisdictions to finalize and implement the agreed reforms so that the financial system can absorb rather than amplify stress.”
At the same time, the financial system continues to face fundamental trends — such as increased digitalization, the growth of artificial intelligence usage and climate change — that have implications for financial stability, the FSB said.
“As we develop new policy measures, it is essential that the existing reforms are fully implemented. There is no room for complacency in this regard, because adverse shocks could act on any unaddressed vulnerabilities,” it said.
Read More: Risks lurk as reform implementation lags: FSB
