The Financial Stability Board said Monday that financial systems remain vulnerable to risks of fiscal strains in national and local governments, as well as weak economic conditions.
The board met in Paris to review risks and vulnerabilities affecting the global financial system as well as progress on regulatory reform efforts in Basel III.
"The potential for adverse feedback loops between weak economies, fragile banking systems and fiscal strains remains significant," the board said. "Further financial stability challenges arise from potential market pressures and risks of [a] disorderly unwinding of large capital inflows to faster-growing emerging markets."
In its review, the FSB said regulators should quicken the pace of financial system repair by identifying and quickly resolving weak banks in an orderly way. The board said it is crucial to intensify scrutiny in targeted areas to undercut the negative side effects of low interest rates and low market incentives for banks to adjust.
It also backed the proposals released this month by the Basel Committee on Banking Supervision that are intended to strengthen capital and liquidity standards. The leaders of the G-20 nations are expected to sign off on the package when they meet in Seoul in November.
"The standards will markedly increased the resilience of the banking system, by reducing the likelihood and severity of future financial crises and creating a less pro-cyclical banking system that is better able to support long-term economic growth," FSB said.
It also reviewed policy approaches to problems related to the too-big-to-fail issue.
It said it will make recommendations to the G-20 in November on expanding the coverage of systemically risky institutions to include higher loss-absorption capacity, stronger supervision and paying for resolutions without taxpayer support.
It also plans to give the G-20 a report on adopting central clearing and trade reporting on over-the-counter derivatives.
