Global policymakers are making solid progress on the financial regulatory reforms, according to reports issued Friday by the Financial Stability Board.
The FSB Friday issued three progress reports, and sent a letter to the G20 finance ministers and central bank governors, on a variety of regulatory reforms, highlighting efforts to build resilient financial institutions; end ‘too big to fail’ regimes; strengthen the oversight of shadow banking activities; and complete reforms concerning over-the-counter derivatives markets; among other things.
The letter from FSB chairman and Bank of Canada governor, Mark Carney, says that “solid progress” is being made in the priority areas identified by the G20 leaders. It notes that financial institutions are making progress strengthening their balance sheets, as both capital and funding liquidity levels are rising.
It notes that a number of efforts are underway to strengthening the oversight and regulation of shadow banking, including an initiative to track risks in the sector; and regulatory recommendations: to mitigate the spill-over effect between the regular banking system and the shadow banking system; to reduce the susceptibility of money market funds to ‘runs’; to assess and mitigate systemic risks posed by shadow banking entities other than money market funds; to assess and align the incentives associated with securitization to prevent a repeat of the creation of excessive leverage; and, to dampen risks and pro-cyclical incentives associated with securities lending and repos that may exacerbate funding strains at times of shocks to confidence. The full set of recommendations will be issued by end-2012.
In terms of OTC derivatives reforms, it says that “work is well advanced to establish a safe environment for clearing OTC derivatives through a global framework of central counterparties, which it says should allow national authorities to make informed decisions on the appropriate form of CCPs to meet the G20 commitment to centrally clear all standardised OTC derivatives by the end of 2012.
It also issued a progress report on efforts to extend the framework for global systemically important banks to domestic systemically important banks. It says that the FSB and the Basel Committee are leaning towards a set of principles as a minimum framework. The goal is to complete the framework by November.
The FSB also reports that the accounting standards setters, the IASB and FASB, are making progress on projects to converge their standards on financial instruments, including a joint expected loss impairment approach, and a more converged approach to classification and measurement. The IASB and FASB will conduct further public consultations in the second half of 2012, and expect to issue final converged standards in a number of key areas by mid-2013, it says.
The FSB says that at the June G20 summit, it plans to issue separate progress reports on the three priority areas where reforms are furthest advanced (Basel III, OTC derivatives, and compensation practices), together with an overall overview progress report and an updated scoreboard of reforms.