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'No complacency' for global regulators, says Carney, as he sets out further banking reform proposals

Out-Law News | 06 Sep 2016 | 10:48 am | 2 min. read

Leaders of the G20 group of major global economies have been urged to "finish the job" of implementing the regulatory reforms developed in response to the financial crisis, according to the Financial Stability Board (FSB).

A letter from FSB chair and Bank of England governor Mark Carney (9-page / 219KB PDF), published ahead of the G20 summit in Hangzhou, China, also sets out the international body's future priorities, which include further action to address the risks to financial stability posed by banker misconduct.

Carney said that financial sector misconduct had "risen to a level that has the potential to create systemic risks by undermining trust in both financial institutions and markets". In response the FSB, which makes recommendations to global regulators, has begun a "major" programme of work on which it intends to present its findings next year, he said.

Issues being examined by the FSB as part of this project include the relationship between remuneration and misconduct, and how to increase individual accountability, according to the letter.

The FSB is also considering the financial stability implications of technology and applications, and intends to report on the regulatory issues that merit further attention early next year, Carney said.

"Our second annual report highlights the achievements to date in strengthening the resilience of the global financial system," he said.

"But this significant progress must not lead to complacency. Our priorities must be to implement our past agreements in a full, timely and consistent manner; to address new risks and vulnerabilities; and to continue to build an open global financial system that benefits all," he said.

Carney's letter was published alongside the FSB's annual report on progress by its member jurisdictions towards implementing the various post-crisis financial reforms. Although implementation progress remains "steady but uneven"; the reforms have increased the resilience of the global financial system in a way that has enabled it to better weather shocks such as the impact of the UK's vote to leave the EU, according to the report.

The largest internationally active banks, deemed by the FSB to be global systemically important banks (G-SIBs), are now "considerably more resilient" than they were before the financial crisis and "remain on track" to meet the Basel III capital liquidity standards before they are introduced in full in 2019, according to the report. These improvements have taken place without affecting "the overall provision of credit to the real economy", the FSB said.

However, the FSB also found that "substantial work" still had to be done by regulators on making sure that effective resolution regimes were in place should their biggest banks get into financial difficulty and need to be wound up. Other areas of improvement highlighted in the report included cross-border resolution plans, and regulation of over-the-counter (OTC) derivatives trading and so-called 'shadow' banking. The FSB itself is developing new recommendations for market-based finance and asset management regulation, it said.

The FSB described the increasing emphasis on market-based finance, rather than bank finance, as "a major positive development, but one that also raises new vulnerabilities".

"As a consequence, the support of [G20 leaders] will be needed to build on the substantial progress to promote resilient market-based finance and develop robust financial market infrastructure," it said.

The FSB said that it would continue to monitor the impact of its recommendations for "material unintended consequences". It will continue to monitor market liquidity in particular, after finding "some evidence of less depth in certain sovereign and corporate bond markets" during further research on this issue.