Innovation and Structural Change – The Financial Stability Board's Workstreams
The overseers of financial services recognize that this industry is not static; they understand and concentrate on the dynamics of change and want to adapt their oversight to them - safely.
The Basel-based Financial Stability Board ("FSB") serves as the secretariat to the G20 governments, supporting those ministries of finance and central banks with extensive research and the corresponding policy proposals to ensure the global system does not veer off course, as it did in 2008-2009. The list of member institutions by G20 country is fundamental to its standing in global affairs.
To assure the most broadly-based, sharpest information delivered beyond that provided by national institutions, multilateral organizations are also full members: the Bank for International Settlements (BIS); the International Monetary Fund (IMF); the Organization for Economic Co-operation and Development (OECD); and the International Bank for Reconstruction and Development (IBRD, World Bank).
The members representing the international standard-setting, regulatory, supervisory, and central bank bodies are: the Basel Committee on Banking Supervision (BCBS); the Committee on Payments and Market Infrastructures (CPMI); the Committee on the Global Financial System (CGFS); the International Accounting Standards Board (IASB); the International Association of Insurance Supervisors (IAIS); and the International Organization of Securities Commissions (IOSCO). Finally, neither national nor global, the European Central Bank and European Commission are member institutions, adding their transnational perspective.
As the financial services industry evolves, authorities need to consider proactively what structural change to the financial system will mean for financial stability. Regulations must be adapted to be effective as daily business circumstances change.
The FSB considers a wide range of issues that might give rise to financial stability risks, individually and when occurring together:
These risks are global in nature and will have effects across all entities, sectors, and economies.
The occurrence of extreme climate events, as well as a disorderly transition to a low-carbon economy, could have destabilizing effects on the financial system, including a rise in risk premia and falling asset prices in the relatively short term. The financial system may also amplify climate-related risks across borders and sectors.
Climate-related risks are far-reaching and differ from other risks to financial stability. They may be subject to substantial uncertainty and tail-risk, as their effects on the financial system might be. As seen today, the effects will be spread over long time horizons, and actions today may determine the severity of risks in the years ahead. The breadth of climate-related risks – including their possible simultaneous occurrence across multiple jurisdictions and sectors – also has implications for the financial system's resilience. The actions needed are both bottom-up and top-down to address risks to individual entities and the system as a whole.
Cross-border payments are central to international trade and economic activity. These payments have faced four challenges for too long: high costs, low speed, limited access, and insufficient transparency. Faster, cheaper, and more transparent and inclusive cross-border payments would have widespread benefits for supporting economic growth, international trade, global development, and financial inclusion.
The FSB has been leading work to assess and address the decline in correspondent banking and remittance payments since 2015. This work has now been integrated into the G20 cross-border payments roadmap.
Widespread take-up of crypto-assets and global "stablecoins" outside most of the regulated segments of financial services has the potential to change the structure of the global financial system significantly.
As a result, the FSB has considered whether there are financial stability risks that need to be considered with these developments.
Enhancing cyber resilience is a key, constantly evolving element of the FSB's work program to promote stability. Cyber incidents pose a constant threat: a significant cyber incident, if not properly contained, could seriously disrupt the financial system, including critical infrastructure. This could lead to broader instability and possible failures in institutional operations – this problem could spread very quickly and broadly. The FSB has undertaken a series of actions to address cyber risk:
The FSB defines FinTech as technologically enabled innovation in services that could result in new business models, applications, processes, or products with an associated material effect on markets and institutions and, indeed, the provision of their business services. FinTech innovations affect many different areas of this industry.
The FSB monitors these activities and assesses their implications; its work draws on the expertise of standard-setters and surveys of national authorities' supervisory and regulatory approaches to FinTech activity. Also, the FSB has established its own Financial Innovation Network to monitor trends and effects. Among the issues that the FSB has considered, and published reports on, are the role of large technology companies providing financial services ("BigTech"), supervisors' take-up of technology ("SupTech"), and the use of technology by regulated institutions to meet regulatory requirements ("RegTech").
Non-Bank Financial Intermediation
The non-bank financial intermediation ("NBFI") ecosystem comprises a diverse set of financial activities, entities, and infrastructures. Non-bank financial institutions – comprising investment funds, insurance companies, pension funds, and other financial intermediaries – have different business models, balance sheets, and governance structures, and are subject to distinct regulatory frameworks within and across jurisdictions. These institutions play an increasingly important role in financing the real economy and managing households' and corporates' savings. They are a valuable alternative to bank financing and help support real economic activity.
Nevertheless, non-bank financing may become a source of systemic risk if it involves maturity/liquidity transformation or leads to the build-up of leverage. The diversity and growing involvement of non-bank entities in credit provision has led to more interconnections, including on a cross-border basis. This means that stress in the sector can be transmitted more widely to other parts of the financial system and the broader economy than in the past.
Finance is a heavily regulated industry, and, in this regard, the FSB's work is authoritative - everywhere. Also, the operators of the world's financial service centers should leverage the information from this free public good to keep their work authoritative.
WAIFC members must ensure that transformation – constant updating – occurs in their marketplace for reasons of efficiency and competition. They must also be mindful of the necessity to uphold public policy boundaries set by global authorities, which are summarized by the FSB agenda.