Financial Stability Board Warns Countries Against Protectionism

WASHINGTON — The Financial Stability Board on Friday urged global regulators to refrain from pursuing protectionist policies, but said they should continue to advance work to reduce systemic risk caused by interconnectedness.

"A resilient and global system will provide credit most efficiently and support strong, sustainable and balanced global growth," Mark Carney, chairman of FSB and Bank of Canada Governor wrote, in an April 15th letter to the Group of 20 Finance Ministers and Central Bank Governors. "We need to continue to rebuild confidence in the long-term robustness of the global financial system and resist pressures to ring-fence national markets."

The FSB said policymakers have made progress, but that there is still more work ahead to strengthen the global financial system.

"Although important steps have been taken to strengthen the system, we are only part way through a multi-year financial reform process, whose successful completion will require our continued cooperation and our sustained focus and effort," Carney wrote.

In its letter, the FSB updated leaders on regulators' progress in implementing Basel III, improving resolution regimes to help end "too big to fail," and strengthening the oversight and regulation of the shadow banking system, among other issues.

The FSB released its latest progress on Basel III implementation last week ahead of the G-20 meeting in Washington, which was held on April 18-19.

Since October, eight more of the 27-member countries have issued final Basel III rules, bringing the total to 14. The remaining countries, including the United States and the European Union, have published their draft regulations.

"To reduce concerns about an uneven playing field, these remaining jurisdictions should finalize rules soon and align implementation with the agreed transition deadlines," Carney wrote.

They also noted that bank capital levels are rising faster than was laid out in the Basel III phase-in agreements. The average common equity capital ratio of large internationally active banks rose to 8.5% from 7.1% of risk weighted-assets.

On resolution planning, the FSB said it completed its first in a series of iterative peer reviews on existing resolution regimes and any changes countries planned to make based on guidelines developed by the FSB, but still much more work needs to be done.

For example, many countries lack the powers needed to resolve systemically important financial institutions, such as authority to do write downs and convert liabilities of a failing institution to equity.

The majority of jurisdictions also lack power to take control of the parent company or affiliates of the failed bank, nor do they have the authority to resolve systemic non-bank institutions.

Additionally, most countries lack even a statutory requirement to have resolution authority.

"Legislation is needed in many jurisdictions to make resolution of G-SIBs feasible," Carney wrote. "With the EU home to 14 of the 28 G-SIBs, the adoption and implementation of an EU Recovery and Resolution Directive fully consistent with the Key Attributes will be a significant step in this direction."

Separately, the FSB said it reviewed comments on the shadow banking policy recommendations issued last November.

"Commentators supported addressing shadow banking risks based on economic functions and activities performed rather than on legal entity types," Carney wrote. "They also called for close co-ordination of the various regulatory initiatives underway and for impact assessments of the principal policy measures, especially in relation to haircuts in repo and securities lending markets."

The FSB said a package of policy recommendations will be made to the G-20 leaders, which will include the next stage of ongoing monitoring and policy process.

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