Non-bank financial firms such as investment funds have exhibited vulnerabilities during the COVID-19 pandemic that might need fixing to help economies recover, the Financial Stability Board (FSB), which coordinates financial rules for G20 economies, said yesterday.
An initial wave of volatility has ebbed, but markets remain under great strain and in some cases are showing illiquidity, the board said.
The effects of the pandemic on credit markets and investment funds have highlighted potential vulnerabilities, and the need to understand the risks and resulting policy implications, said board chair Randal Quarles, who is also vice chairman for banking supervision at the US Federal Reserve.
“It is more important than ever to ensure that we can reap the benefits of this dynamic part of the financial system without risking financial stability,” Quarles said in a letter to G20 finance ministers and central bank governors, who are holding virtual meetings this week.
The board said that it has set up a group to fine tune work on investment funds and credit markets.
“Shadow banking” — which includes money market funds, hedge funds and private equity — has grown considerably since the financial crisis a decade ago, moving into bank-like activities such as credit as traditional lenders became more risk averse.
Board members have been involved in intensive, daily information exchanges to coordinate national responses, Quarles said.
Regulators have come under heavy pressure from banks to loosen capital buffers and ease provisioning requirements for bad loans, as businesses struggle to stay afloat during lockdowns.
The board is guiding G20 members on using existing flexibility in global rules, while also preserving collective support for the standards, Quarles said.
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