Ahead of G20 meeting, FSB chairman warns of economic downturn

The Financial Stability Board today released a letter from Chairman Klaas Knot warning of vulnerabilities in the global financial system and providing an update on the group’s work in key areas.

The letter, sent to G20 finance ministers and central bank governors ahead of a meeting later this week, warned that the combination of slower growth, rising inflation and tightening Global financial conditions could exacerbate pre-existing weaknesses in global markets or reveal new ones. We should mention in particular the increase in sovereign, corporate and household debt; liquidity asymmetries and hidden leverage in non-bank financial intermediation; and the negative effects of tighter financial conditions in emerging markets and developing economies. The letter also outlined the risks associated with financial stress in commodity markets.

Additionally, Knott provided updates on recent FSB work in three areas: COVID-19 response, climate, and cryptocurrency, including a report released today on exit strategies to support a fair recovery and the effects of COVID-19 on the financial sector. The letter noted that economic vulnerabilities kept at bay by support measures during the pandemic could now materialize “when policy space is limited and businesses and households have reduced their financial reserves”.

Knott added that the FSB has also updated its roadmap for addressing climate-related financial risks in disclosures, data, vulnerability analysis, and regulatory and oversight approaches. The FSB will publish its work with the Network for Greening the Financial System on climate scenarios in November and the final version of its report on prudential and regulatory approaches to climate-related risks in October.

The letter also revisited the FSB’s statement yesterday on crypto assets, reiterating that stablecoins and other crypto assets do not operate in a regulatory-free space and must meet all applicable regulatory requirements.