Following a meeting in Paris Tuesday, the Financial Stability Board declared that financial markets are healing, but it cautioned that the progress remains fragile and credit is still scarce.

The FSB notes that while many financial institutions have returned to profitability in recent quarters, “this owes much to the extraordinary official measures to stabilise the system.” And, it says that banks must conserve this capital to support lending and prepare for higher capital requirements.

In addition to the repairs being carried out within the industry, the FSB noted that financial sector policy must be reformed too. “There is a risk that a revival of concerns about the sustainability of the recovery could trigger renewed banking sector strains and turbulence in asset markets. To address the current challenges, authorities will continue to foster the strengthening and transparency of balance sheets,” it said. And, it noted that policymakers must work to rebuild securitisation markets.

The FSB will submit two reports to the G20 Leaders’ Summit in Pittsburgh next week: an overview of the progress since the London Summit, and a forward-looking assessment of next steps for improving financial regulation.

It says that “good progress” has been made on previous reforms, including: strengthening of the Basel capital framework; enhanced accounting standards; higher risk management standards; improved disclosures of on- and off-balance sheet exposures by banks; the introduction of central counterparties for over-the-counter derivatives; the development of stronger oversight regimes for hedge funds and credit rating agencies; and improved supervisory coordination and cooperation.

However, it says, “Much work remains to be done to implement the reform agenda in full.” That agenda includes: further strengthening of the global capital framework; making global liquidity more robust; reducing moral hazard and strengthening capacity for cross-border resolution; strengthening accounting standards; improving compensation practices; expanding oversight of the financial system; strengthening the robustness of the OTC derivatives market; restarting securitisation markets; and ensuring adherence to international standards.

IE