The Financial Stability Implications of Artificial Intelligence

14 November 2024 | PDF full text (633 KB)

The rapid adoption of AI in finance means that authorities should address information gaps for monitoring, assess the adequacy of current policy frameworks and enhance supervisory and regulatory capabilities.

This report revisits the 2017 FSB report on AI and machine learning in financial services by taking stock of recent advancements, exploring use cases in the financial sector and drivers of adoption, as well as new potential benefits and AI-related financial sector vulnerabilities.

In the past few years, technological advancements and increased computational power have led to an uptake in AI adoption by financial firms and supervisors. AI offers benefits such as increased operational efficiency, regulatory compliance, financial product customisation and advanced analytics. With the advent of generative AI (GenAI) and large language models, the range of use cases has become more diverse.

While AI offers benefits like improved operational efficiency, regulatory compliance, personalised financial products, and advanced data analytics, it may also potentially amplify certain financial sector vulnerabilities. AI-related vulnerabilities that stand out for their potential to increase systemic risk include: (i) third-party dependencies and service provider concentration; (ii) market correlations; (iii) cyber risks; and (iv) model risk, data quality and governance. GenAI also increases the potential for financial fraud and disinformation in financial markets. Misaligned AI systems that are not calibrated to operate within legal, regulatory, and ethical boundaries can also engage in behaviour that harms financial stability. And from a longer-term perspective, AI uptake could also drive changes in market structure, macroeconomic conditions and energy use that could have implications for financial markets and institutions.

While existing regulatory and supervisory frameworks address many of the vulnerabilities associated with AI adoption, more work may be needed to ensure that these frameworks are sufficient. The report calls for national financial authorities and international bodies to enhance monitoring of AI developments, assess whether financial policy frameworks are adequate, and enhance their regulatory and supervisory capabilities including by using AI-powered tools.

FSB assesses the financial stability implications of artificial intelligence

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Ref: 28/2024

  • Report notes that the rapid adoption of artificial intelligence (AI) offers several benefits but may also amplify certain financial sector vulnerabilities, such as third-party dependencies, market correlations, cyber risk and model risk, potentially increasing systemic risk.
  • While existing financial policy frameworks address many of the vulnerabilities associated with use of AI by financial institutions, more work may be needed to ensure that these frameworks are sufficiently comprehensive.
  • Report calls for financial authorities to enhance monitoring of AI developments, assess whether financial policy frameworks are adequate, and enhance their regulatory and supervisory capabilities including by using AI-powered tools.

The Financial Stability Board (FSB) published today The Financial Stability Implications of Artificial Intelligence, a report outlining recent developments in the adoption of artificial intelligence (AI) in finance and their potential implications for financial stability.

Widespread adoption and more diverse use cases of AI have prompted the FSB to revisit its 2017 report on AI and machine learning in financial services. Financial firms currently use AI mainly to enhance internal operations and improve regulatory compliance, but generative AI (GenAI) and large language models have given rise to new use cases, such as document summarisation, information retrieval, and code generation. While many financial institutions appear to be taking a cautious approach to using GenAI, interest remains high and the technology’s accessibility could facilitate more rapid integration in financial services.

Financial authorities are also using AI for more efficient supervision. The fast pace of innovation and AI integration in financial services, along with limited data on AI usage, poses challenges for monitoring vulnerabilities and potential financial stability implications.

The report notes that AI offers benefits from improved operational efficiency, regulatory compliance, personalised financial products and advanced data analytics. However, AI may also amplify certain financial sector vulnerabilities and thereby pose risks to financial stability.

Several AI-related vulnerabilities stand out for their potential to increase systemic risk. These include: (i) third-party dependencies and service provider concentration; (ii) market correlations; (iii) cyber risks; and (iv) model risk, data quality and governance. In addition, GenAI could increase financial fraud and disinformation in financial markets. Misaligned AI systems that are not calibrated to operate within legal, regulatory, and ethical boundaries can also engage in behaviour that harms financial stability. And from a longer-term perspective, AI uptake could drive changes in market structure, macroeconomic conditions and energy use that may have implications for financial markets and institutions.

The report notes that existing regulatory and supervisory frameworks address many of the vulnerabilities associated with AI adoption. However, more work may be needed to ensure that these frameworks are sufficiently comprehensive. To this end, the report calls on the FSB, standard-setting bodies and national authorities to: (i) consider how to address data and information gaps to better monitor AI adoption and assess the related financial stability implications; (ii) assess whether current financial policy frameworks are sufficient to address AI-related vulnerabilities both at domestic and international level; and (iii) enhance regulatory and supervisory capabilities, for example by sharing information and good practices across border and sectors as well as leveraging AI-powered tools.

Notes to editors

This report revisits the 2017 FSB report on AI and machine learning in financial services by taking stock of recent advancements, current use cases in the financial sector and drivers of adoption, as well as new potential benefits and AI-related financial sector vulnerabilities. The report draws on the experience and initiatives of FSB member jurisdictions, existing literature, and stakeholder outreach events including an OECD-FSB joint AI roundtable.

The FSB coordinates at the international level the work of national financial authorities and international standard-setting bodies and develops and promotes the implementation of effective regulatory, supervisory, and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with approximately 70 other jurisdictions through its six Regional Consultative Groups.

The FSB is chaired by Klaas Knot, President of De Nederlandsche Bank. The FSB Secretariat is located in Basel, Switzerland and hosted by the Bank for International Settlements.

The importance of resolution planning and loss-absorbing capacity for banks systemic in failure: Public statement

13 November 2024 | PDF full text (175 KB)

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Ref: 27/2024

Ensuring bank resolvability remains the most efficient way to tackle the problem of the implicit ‘too big to fail’ subsidy for big banks and to avoid a bail-out by the taxpayer.1 The lessons from the 2023 bank failures reinforced the need to maintain momentum and advance the work on bank resolvability and to avoid complacency.2 That experience underscored that any financial institution that could be systemically significant or critical if it fails should be subject to a resolution regime that has the attributes set out in the FSB Key Attributes of Effective Resolution Regimes for Financial Institutions (Key Attributes).3 The FSB’s work on bank resolution until now has primarily focused on global systemically important banks (G-SIBs). Significant progress has been made to enhance their resolvability since the adoption of the FSB’s Key Attributes. However, existing FSB guidance on resolution planning and resolution execution may also be relevant for other banks that may be systemically significant or critical if they fail (“banks systemic in failure”). The failure of such banks could also have severe consequences for the financial system or the broader economy, and authorities and such banks should be prepared for resolution. Previous FSB evaluations,4 peer reviews,5 and technical work undertaken by the FSB6 suggest further work is needed on operationalising resolution planning for these banks. The current statement aims to clarify the importance of resolution preparedness for these banks, recognising that the principles outlined are already established for G-SIBs.

Following the March 2023 bank failures,7 the FSB held a workshop on banks systemic in failure. This statement is informed by discussions at that workshop and other ongoing work. Below are some considerations to inform jurisdictions’ regulatory and policy frameworks for the resolution preparedness of banks systemic in failure. Besides its work on G-SIBs, the FSB will continue to consider banks systemic in failure in its future work on bank resolution planning topics.

Authorities should assess which banks may be systemically significant or critical if they fail

Resolution authorities, in coordination with other relevant authorities, should assess which banks may be systemically significant or critical if they fail. Authorities should ensure they have sufficient information to make this assessment in normal times and in a crisis. This also includes banks that were not explicitly designated as systemically significant or critical prior to their failure.

Authorities and banks systemic in failure should be prepared for resolution

Authorities should have the appropriate resources, tools, and powers to, if needed, resolve banks systemic in failure. Authorities’ preparedness includes having an up-to-date assessment of the options available to conduct such resolution, and assurance that such options can be implemented quickly and effectively.  Banks systemic in failure should ensure they are resolvable in a way that protects their critical functions without severe systemic disruption and avoids the use of taxpayers’ money.

Authorities should consider the need for loss-absorbing capacity

Loss-absorbing capacity (LAC) on the balance sheet of a bank enhances authorities’ ability to resolve the bank without severe systemic disruptions and without the use of taxpayers’ money. It also provides for an additional layer of loss-absorption that may prevent negative systemic effects and uninsured depositors from taking losses, which may forestall or reduce deposit runs.

At the same time, banks and banking systems in different jurisdictions have different characteristics. For this reason, jurisdictions need to consider how to best implement the concept of LAC for banks established in their jurisdictions. Some TLAC Principles for G-SIBs are relevant also for other banks systemic in failure. A number of FSB jurisdictions have already adopted external LAC requirements for banks, beyond G-SIBs, that could be systemically significant or critical if they fail, where authorities set the amount, quantity and implementation timeline on a case-by-case basis. Such LAC requirements are for instance applied to all banks (EU, Hong Kong, UK), to D-SIBs (Canada, Mexico, Switzerland), or to a subset of D-SIBs (Japan).8

The full statement, including additional background information is in the PDF attached above.

Annex: Background to the FSB’s public statement

Introduction

In November 2023, the FSB held a workshop on how authorities assess systemic significance of banks and issues related to LAC (i.e., a set of capital and debt instruments to ensure loss absorbency and recapitalisation in crisis) for banks other than G-SIBs. The discussions were informed by the failures of three large regional banks in the United States in early 2023, which confirmed that banks not identified as G-SIBs can still be systemically significant or critical if they fail. Workshop participants discussed jurisdictions’ practices in assessing systemic significance, existing jurisdictional LAC frameworks, challenges identified when a bank issues LAC, cross-border aspects of LAC, and the extent to which the Principles on Loss-absorbing and Recapitalisation Capacity of G-SIBs in Resolution (TLAC Principles)9 may also be relevant for other banks systemic in failure.

The workshop discussions informed the development of the above public statement, which provides considerations to inform jurisdictions’ regulatory and policy frameworks for the resolution preparedness of banks systemic in failure. Such banks are subject to a large variety of jurisdictional frameworks, provide different economic functions, and function in different economic structures. Therefore, each jurisdiction needs to determine which of its banks other than G-SIBs may be systemic in failure and how to best ensure that these banks can be resolved in an orderly manner without exposing taxpayers to loss from solvency support, while maintaining continuity of banks’ vital economic functions. Such determinations are relevant both during resolution planning and at the time of a bank’s failure.

Assessing systemic significance and criticality

Having an ex-ante view on whether a bank may be systemically significant or critical if it fails supports resolution authorities’ preparedness and informs the resolvability requirements authorities may impose on banks, including a LAC requirement. To assist authorities in assessing systemic significance in the context of resolution planning, two international guidance documents are available, the implications of which authorities should assess not only on a standalone basis, but also jointly. The FSB Guidance on Identification of Critical Functions and Critical Shared Services10 and the Basel Committee on Banking Supervision (BCBS) standard SCO50 on domestic systemically important banks (D-SIBs)11 both provide an ex-ante view on systemic significance or criticality. Each of these standards then focuses on a different point in the lifecycle of a bank (i.e., the BCBS standard is on systemic importance in going concern, while the FSB guidance covers criticality in failure) and thus the results of their standalone application may not be the same. Jurisdictions’ existing practices are generally based on either the FSB guidance or the BCBS standard, or elements of both.

Designating some banks as systemically significant or critical to subject them to resolution planning and LAC requirements may affect not only an individual bank but also indirectly other market participants (e.g. smaller banks that would be ordinarily liquidated in a crisis). Therefore, in addition to financial stability considerations and broader resolution objectives, when designating banks as systemically significant or critical, it would be important to consider such indirect impacts.

Notwithstanding ex-ante assessments, extraordinary circumstances may prompt authorities to consider a bank systemically significant or critical at the time of failure, for example if there is a risk of wider-than-expected contagion, which may require them to exercise their resolution powers in a different manner than they would have done absent those circumstances. It is thus appropriate that authorities also consider upfront how they would approach assessing systemic significance or criticality at the moment of failure, and what information they may need for those assessments. Elements of both frameworks – the FSB Guidance and the BCBS standard SCO50 – can inform such assessments.

Loss-absorbing capacity

Having LAC on banks’ balance sheets provides several benefits. These include the enhanced capability for authorities to resolve those banks without severe systemic disruption and without exposing taxpayers to loss from solvency support. Additionally, the availability of sufficient LAC, which provides an additional layer of loss-absorption before uninsured deposits, may forestall or largely reduce deposit runs.12 LAC is not only relevant when resolving a bank via bail-in but also when resolving a bank via the use of transfer tools. Absent sufficient LAC to recapitalise a bank, resolution authorities might have to resort to other sources of loss-absorption to execute resolution successfully.13

LAC requirements for banks systemic in failure support authorities’ efforts to mitigate risks to financial stability. When setting or reviewing their LAC policy, authorities may consider the underlying rationale of the TLAC Principles and the Guiding Principles on Internal TLAC applicable to G-SIBs14 also for other banks systemic in failure. Existing jurisdictional LAC frameworks for such banks tend to reflect the following TLAC Principles:15

  • There must be sufficient loss-absorbing and recapitalisation capacity available in resolution to implement an orderly resolution that minimises any impact on financial stability, ensures the continuity of critical functions, and avoids exposing taxpayers (that is, public funds) to loss with a high degree of confidence. (cf. TLAC Principle (i)).
  • Investors, creditors, counterparties, customers and depositors should have clarity about the order in which they will absorb losses in resolution (cf. TLAC Principle (xi)). A transparent hierarchy of liabilities on a legal entity basis for all resolution entities and material subgroup entities in the group provides clarity about how losses are absorbed and recapitalisation is effected in resolution.
  • Instruments that are eligible to meet minimum LAC requirements should be stable, long-term claims that are not repayable on demand or at short notice (cf. TLAC Principle (viii)). Maturity restrictions on LAC instruments are important to ensure that, if a bank’s financial situation deteriorates, the loss-absorbing capacity available in any subsequent resolution is not diminished through a withdrawal of funds.
  • Exposing instruments eligible for minimum LAC to loss should be legally enforceable and should not give rise to systemic risk or disruption to the provision of critical functions (cf. TLAC Principle (vii)). Subordination (whether statutory, structural, or contractual) of eligible LAC to operational liabilities on which the performance of critical functions depends can help ensure that the eligible LAC can be credibly and feasibly loss-absorbing.

The nature and operating environment of the jurisdiction’s banking sector is important when considering the feasibility and design of any domestic LAC framework. There is significant variation across jurisdictions in banks’ business models, available financial safety nets, and characteristics of domestic financial markets. These variations may partially explain why different jurisdictions take different approaches to LAC frameworks, for instance in terms of requirements on the amount or quality of instruments eligible to count as LAC, or scope of application. If a jurisdiction intends to implement a LAC framework, the assessment of banks’ systemic significance or criticality in failure will be an important aspect that informs the framework’s scope of application.

There are considerations that may be relevant for some jurisdictions regarding issuing LAC, such as demand in the market, banks’ funding costs, and preparing for issuing LAC (such as obtaining a credit rating, compliance with securities laws and prospectus requirements, market outreach, and know-how). That said, there have been examples of jurisdictions with less advanced debt markets in which small- and medium-size banks successfully issued LAC.

Several measures may be available to authorities to address these considerations. For example, they could phase in a LAC framework and calibrate proportionately the target levels for the amount and quality of LAC requirements in line with the preferred resolution strategy. Moreover, they could induce banks systemic in failure to: (i) conduct self-assessments on the LAC eligibility of their debt instruments, (ii) obtain a credit rating, and (iii) involve external advisers to increase market outreach and broaden their investor base. Authorities could also: (i) consider the relevant factors (e.g. access to capital markets) in determining the timeline for LAC implementation, (ii) support banks to develop a well-established issuance plan, and (iii) engage with market participants to promote understanding of resolution and LAC instruments and closely monitor market responses to LAC issuances.

Cross-border aspects

The distress of a bank systemic in failure can create cross-border spillovers. Since financial systems are interconnected across borders, banks that are systemic for a national financial system can also have an international footprint. It is therefore important for authorities to consider potential spillover effects when considering the resolvability of a bank. There are also cases where a bank may be systemic in the host jurisdiction, but the home authority has not made this determination for the group, or the operations in the host jurisdiction are not considered material to the group. In such cases, it is nonetheless important for authorities to establish avenues for cross-border information exchange and cooperation. Structures similar to the Crisis Management Groups (CMGs) that are in place for G-SIBs may be appropriate for other banks with systemic cross-border presence. Additionally, the FSB guidance on cooperation with non-CMG host authorities might provide useful considerations for cases of cross-border banks systemic in failure where CMG-like structures are not presently in place.16

A number of jurisdictions have adopted internal LAC requirements in order to ensure the appropriate distribution of loss-absorbing and recapitalisation capacity within resolution groups for banks systemic in failure, following principles and eligibility features similar to those prescribed in the Guiding Principles on Internal TLAC of G-SIBs. Authorities and banks would need to consider any legal and operational constraints in deploying resources across borders, including the upstreaming of losses from a subsidiary to a foreign parent (beyond equity losses).17

  1. FSB (2015a), TLAC Principles and Term Sheet, November. ↩︎
  2. FSB (2013), Guidance on Identification of Critical Functions and Critical Shared Services, July. ↩︎
  3. See BCBS principles to identify domestic systemically important banks, SCO50 Domestic systemically important banks. ↩︎
  4. See, for example, FDIC (2023), Remarks by Chairman Martin J. Gruenberg on The Resolution of Large Regional Banks — Lessons Learned, August. ↩︎
  5. Examples of such sources are a resolution fund; a deposit insurance fund that can contribute to resolution; or, as a last resort, support by public authorities with ex-post reimbursement by banks. ↩︎
  6. FSB (2017), Guiding Principles on the Internal Total Loss-Absorbing Capacity of G-SIBs (‘Internal TLAC’), July. ↩︎
  7. This is a non-exhaustive list and does not intend to suggest that remaining TLAC principles might not be relevant when considering loss-absorbing capacity for banks systemic in failure. ↩︎
  8. FSB (2015b), Guidance on Cooperation and Information Sharing with Host Authorities of Jurisdictions where a GSIFI has a Systemic Presence that are Not Represented on its CMG, November. ↩︎
  9. See also FSB (2023c), Deployment of Unallocated Total Loss-Absorbing Capacity (uTLAC): Considerations for Crisis Management Groups (CMGs), July. ↩︎
  1. FSB (2023a), 2023 Bank Failures: Preliminary lessons learnt for resolution, October. ↩︎
  2. FSB (2023b), 2023 Resolution Report: ‘Applying Lessons Learnt’, December. ↩︎
  3. FSB (2024), Key Attributes of Effective Resolution Regimes for Financial Institutions (revised version 2024), April. The Key Attributes were adopted by the FSB Plenary in October 2011 and endorsed by the G20 Heads of State and Government as “a new international standard for resolution regimes” at the Cannes Summit in November 2011. ↩︎
  4. FSB (2021), Evaluation of the effects of too-big-to-fail reforms: Final Report, March. ↩︎
  5. FSB (2019), Thematic Peer Review on Bank Resolution Planning, April. ↩︎
  6. FSB (2022), 2022 Resolution report: Completing the agenda and sustaining progress, December. ↩︎
  7. FSB (2023a), 2023 Bank Failures: Preliminary lessons learnt for resolution, October. ↩︎
  8. In the US, the Comptroller of the Currency, the Federal Reserve System, and the Federal Deposit Insurance Corporation requested comment on a proposed rule on Long-Term Debt Requirements for Large Bank Holding Companies, Certain Intermediate Holding Companies of Foreign Banking Organizations, and Large Insured Depository Institutions. ↩︎

FSB reports on progress towards globally consistent and comparable climate-related disclosures

12 November 2024

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Ref: 26/2024

  • Jurisdictions have made progress implementing the International Sustainability Standards Board (ISSB) disclosures standards, strengthening interoperability with other sustainability disclosure frameworks, and developing global assurance and ethics standards for such disclosures.
  • The large majority of FSB jurisdictions have regulations, guidelines or strategic roadmaps in place for climate-related disclosures. Most FSB jurisdictions have also set or proposed disclosure requirements based on ISSB Standards and the recommendations of the Task Force on Climate-related Disclosures (TCFD).
  • Report calls for more work to address challenges with using the ISSB standards for small- and medium-sized enterprises (SMEs) and for companies in emerging market and developing economies (EMDEs).

The Financial Stability Board (FSB) published today its 2024 progress report on Achieving Consistent and Comparable Climate-Related Disclosures, drawing on a survey of FSB member jurisdictions and input from standard-setting bodies and international organisations.

Global efforts are now focused on supporting jurisdictions in adopting, applying, or otherwise being informed by the two disclosure standards issued by the ISSB in 2023. Work is underway, by the ISSB and other organisations, to provide implementation support and capacity building to address challenges faced by SMEs and by companies in EMDEs in using these standards. Significant progress has also been achieved in interoperability between the ISSB Standards and other regional and jurisdictional disclosure frameworks, as well as in connectivity with financial reporting and prudential reporting requirements.

Nineteen out of 24 FSB member jurisdictions have regulations, guidelines or strategic roadmaps in place for climate-related disclosures. Seventeen FSB jurisdictions have set or proposed voluntary or mandatory disclosure requirements based on the ISSB standards and the recommendations by the TCFD. Moreover, several jurisdictions have taken concrete steps towards introducing assurance requirements to enhance the reliability and usefulness of climate-related disclosures.

The FSB report summarises the key findings of the International Financial Reporting Standards (IFRS) Foundation’s Progress Report on Corporate Climate-related Disclosures, which has also been published today. The IFRS Foundation’s report concludes that companies’ progress in disclosing climate-related financial information using the TCFD recommendations or the ISSB Standards is encouraging, but more progress is necessary.

Notes to editors

Addressing the financial risks from climate change is a key priority of the FSB. High-quality, consistent, and comparable firm-level disclosures are essential for assessing and managing these risks and for increasing transparency at the domestic and international levels.

In July 2021, the FSB published a comprehensive Roadmap to address climate-related financial risks, outlining the key actions to be taken by standard-setting bodies and other international organisations over a multi-year period in four key policy areas: firm-level disclosures, data, vulnerabilities analysis, and regulatory and supervisory practices and tools.

Progress on firm-level disclosures of their climate-related financial risks was initially based on the recommendations developed by the TCFD. With the release of the ISSB’s inaugural sustainability-related disclosure standards in 2023, the TCFD has been disbanded. The FSB continues to monitor work to strengthen the relevance, reliability and comparability of climate-related financial disclosures through its progress report on climate-related disclosures. Following an FSB request in October 2023, the monitoring of progress on companies’ climate-related disclosures has been taken over by the IFRS Foundation.

The report released today by the FSB includes input from its member jurisdictions and the following standard-setting bodies: International Sustainability Standards Board (ISSB), International Organization of Securities Commissions (IOSCO), International Auditing and Assurance Standards Board (IAASB), International Ethics Standards Board for Accountants (IESBA), Basel Committee on Banking Supervision (BCBS) and International Association of Insurance Supervisors (IAIS).

The FSB coordinates at the international level the work of national financial authorities and international standard-setting bodies and develops and promotes the implementation of effective regulatory, supervisory, and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with approximately 70 other jurisdictions through its six Regional Consultative Groups.

The FSB is chaired by Klaas Knot, President of De Nederlandsche Bank. The FSB Secretariat is located in Basel, Switzerland and hosted by the Bank for International Settlements.

Achieving Consistent and Comparable Climate-related Disclosures: 2024 Progress report

| PDF full text (567 KB)

Significant progress has been achieved since 2021 in setting internationally consistent and decision-useful climate-related financial disclosure standards, adoption or consideration of these standards across the globe, as well as in establishing international assurance and ethics standards to enhance the reliability of climate- and other sustainability-related disclosures.

This report describes progress made over the past year by FSB member jurisdictions, standard-setters and international organisations towards achieving globally consistent and comparable climate-related disclosures.

Following the publication of the International Sustainability Standards Board (ISSB)’s inaugural sustainability disclosure standards in 2023, the ISSB, standard-setting bodies and international organisations have focussed on providing support – including capacity-building – to jurisdictions and firms for using these standards. Great strides have been made in improving interoperability between the ISSB Standards and other sustainability disclosure frameworks and in establishing a global assurance and ethics framework to ensure sustainability disclosures are reliable and thus decision-useful. Work has also advanced on transition plans, as well as on enhancing the linkage of sustainability-related disclosures with financial reporting and prudential reporting requirements.

Out of 24 FSB member jurisdictions surveyed, 19 reported they have already enacted regulations, issued guidelines or developed strategic roadmaps for climate-related disclosures. Seventeen FSB jurisdictions have set or proposed voluntary or mandatory disclosure requirements based on the ISSB Standards and the recommendations of the Task Force on Climate-related Disclosures (TCFD). Moreover, several jurisdictions have taken concrete steps towards assurance requirements.

This report also summarises the key findings of the International Financial Reporting Standards (IFRS) Foundation’s Progress Report on Corporate Climate-related Disclosures. The IFRS Foundation report concludes that firms have made encouraging progress in disclosing climate-related financial information using the TCFD recommendations or the ISSB Standards, but that more progress is necessary.

FSB MENA Group discusses artificial intelligence, cyber risk and operational readiness

6 November 2024

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Ref: 25/2024

The Financial Stability Board (FSB) Regional Consultative Group for the Middle East and North Africa (RCG MENA) met today in Saudi Arabia. The meeting was hosted by the Saudi Central Bank (SAMA), at its headquarters in Riyadh.

Technological innovation featured prominently on the agenda. Participants took stock of the advances relating to artificial intelligence (AI) in the financial sector and exchanged experiences on how AI is being applied by both supervisors and financial institutions. While the use of AI can generate efficiencies and create value, it also introduces new risks. In this regard, participants look forward to the FSB’s forthcoming report on the financial stability implications of AI. Eddie Yue, co-chair of the RCG for Asia and Chief Executive of the Hong Kong Monetary Authority, attended this meeting to bring in the perspectives of the Asia region, drawn from the RCG Asia workshop in October on the financial stability implications of AI, tokenisation and crypto-assets.

The pervasive role of technology in the financial system has also contributed to the increased frequency and elevated severity of operational and cyber incidents. Recognising that these risks to operational resilience can also arise from reliance on external providers, members discussed their approaches to third-party risk management and cyber incident reporting. They welcomed the FSB’s public consultation on a Format for Incident Reporting Exchange (FIRE) and its potential to address challenges arising from the need for financial institutions to report operational incidents to multiple authorities. Together, FIRE and the FSB’s toolkit for enhancing third-party risk management and oversight can reduce fragmentation, facilitate communications and coordination within and across jurisdictions, and ultimately enhance operational resilience and incident response.

Members exchanged views on global and regional market developments, including perspectives on the financial stability outlook. Topics addressed included the management of the gradual easing in inflation expectations and the role of technology and social media in influencing depositor behaviour.

Finally, members received an update on the FSB’s work programme and expressed their views on the proposed areas of focus for 2025, bringing their regional perspective to the discussion.

Notes to editors

The FSB RCG for the Middle East and North Africa is co-chaired by Governor Ayman Al-Sayari, Saudi Central Bank, and Governor Hassan Abdalla, Central Bank of Egypt. Membership includes financial authorities from Algeria, Bahrain, Egypt, Jordan, Kuwait, Lebanon, Morocco, Oman, Qatar, Saudi Arabia, Tunisia, Türkiye and the United Arab Emirates.

The FSB has six Regional Consultative Groups, established under the FSB Charter, to bring together financial authorities from FSB member and non-member countries to exchange views on vulnerabilities affecting financial systems and on initiatives to promote financial stability.1 Typically, each Regional Consultative Group meets twice each year.

The FSB coordinates at the international level the work of national financial authorities and international standard-setting bodies and develops and promotes the implementation of effective regulatory, supervisory, and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with approximately 70 other jurisdictions through its six Regional Consultative Groups.

The FSB is chaired by Klaas Knot, President of De Nederlandsche Bank. The FSB Secretariat is located in Basel, Switzerland and hosted by the Bank for International Settlements.

  1. The FSB Regional Consultative Groups cover the following regions: Americas, Asia, Commonwealth of Independent States, Europe, Middle East and North Africa, and sub-Saharan Africa. ↩︎

FSB analyses interest rate and liquidity risks and the role of technology and social media on depositor behaviour

23 October 2024

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Ref: 24/2024

  • FSB analysis finds life insurers, non-bank real estate investors, and a weak tail of banks to be most vulnerable to the confluence of solvency and liquidity risks.
  • Technological developments and social media could accelerate future bank runs, with implications for liquidity risk management practices and supervision.
  • Report calls on bank managers and financial sector authorities to address the liquidity and solvency vulnerabilities that give rise to extreme deposit outflows and to be able to react much more quickly to deposit outflows than in the past.

The Financial Stability Board (FSB) published today a report on depositor behaviour and interest rate and liquidity risks in the financial system, drawing on lessons from the March 2023 banking turmoil.

This report summarises the main findings from FSB work over the past year to assess vulnerabilities in the global financial system related to solvency and liquidity risks amid rising interest rates, the influence of technology and social media on depositor behaviour during bank runs, and how the use of technologies may affect the planning and execution of a resolution.

The analysis identifies life insurers, non-bank real estate investors – comprising real estate investment trusts, real estate funds, and other nonbank mortgage lenders –  as well as a weak tail of banks as most vulnerable to solvency and liquidity risks at the current juncture. These entity types typically have a high proportion of interest rate-sensitive assets and liabilities and are affected by higher rates through various solvency and liquidity risk channels.

Some of the deposit runs that took place in March 2023 unfolded at an unprecedented speed. The three fastest deposit runs had outflows of around 20-30% per day, which was faster than the highest peak one-day outflow of past deposit runs reported by FSB members. The scale of deposit runs, as a share of pre-run deposits, was in the upper range of outflows seen in past runs. Banks experiencing the runs tended to have an unusually high reliance on uninsured deposits, while the concentration of the deposit base likely played a role in the large outflows.

There is some evidence that social media had an influence on some of the recent bank runs, though the depositor categories at the centre of those runs are likely to have had access to other information sources. Technological advancements have facilitated an easier and faster transfer of deposits in recent years, which may have made depositors more willing to move funds between banks.

The findings in the report raise issues that are relevant for bank managers, supervisors, regulators, resolution authorities and policy makers. The speed of the recent runs means that banks and authorities may need to be able to react much more quickly to deposit outflows than in the past; find ways to address the liquidity and solvency vulnerabilities that gave rise to such extreme outflows; and consider whether monitoring of social media could be helpful as an early warning tool to flag potential stress at a bank or wider turmoil that might affect banks. Consideration could also be given to collecting and publishing additional information on bank deposits and on unrealised losses on bank securities portfolios to fill identified data gaps.

The possibility of further rapid deposit runs in the future also raises challenges for authorities’ ability to execute a resolution. Authorities and banks should enhance their operational readiness for resolution and incorporate effective communication strategies to ensure coordinated and consistent messaging.

Notes to editors

The FSB provided an overview of the March 2023 banking turmoil and follow-up work in its October 2023 Annual Report on Promoting Global Financial Stability. It also issued a report in October 2023 on preliminary lessons learnt for resolution from the 2023 bank failures.

The FSB coordinates at the international level the work of national financial authorities and international standard-setting bodies and develops and promotes the implementation of effective regulatory, supervisory, and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with approximately 70 other jurisdictions through its six Regional Consultative Groups.

The FSB is chaired by Klaas Knot, President of De Nederlandsche Bank. The FSB Secretariat is located in Basel, Switzerland and hosted by the Bank for International Settlements.

Depositor Behaviour and Interest Rate and Liquidity Risks in the Financial System: Lessons from the March 2023 banking turmoil

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Over 2022 and 2023, interest rates rose significantly in a number of advanced economies, following a decade where rates had remained at historically low levels. Rate increases were higher and faster than generally expected, resulting in significant valuation losses and sometimes precipitous increases in funding costs or liquidity risks. A number of bank deposit runs took place in the period following these interest rate rises, which represented the most serious disruption to the banking sector in more than a decade.
This report summarises the main findings from FSB work over the past year to:

  • assess vulnerabilities in the global financial system from the intersection of solvency and liquidity risks in an environment of higher interest rates;
  • investigate the deposit runs, including the role of technology, social media and interest rates on depositor behaviour; and
  • assess how the use of technologies may affect banks’ and authorities’ planning and execution of a resolution.

The report finds that the three entity types most vulnerable to a combination of solvency and liquidity risks at the current juncture are: (i) a weak tail of banks, (ii) life insurers, and (iii) non-bank real estate investors. The report also finds that technological advancements have facilitated an easier and faster transfer of deposits in recent years and that there is some evidence that social media had an influence on some of the recent bank runs.

The findings in this report raise issues that are relevant for bank managers, supervisors, regulators, resolution authorities and policy makers. The report concludes with policy implications.

Strengthening Financial Resilience: Lessons from Pittsburgh

22 October 2024

Speech by FSB Chair, Klaas Knot at the Bloomberg Global Regulatory Forum, New York, 22 October 2024

The views expressed in these remarks are those of the speaker in his role as FSB Secretary General and do not necessarily reflect those of the FSB or its members.

Good morning everyone.

It could have been right here in New York City. That would have been fitting, as this city was, and still is, the center of gravity for global finance.

But, as it happened, the US administration made a last-minute decision to pick Pittsburgh as the venue for the G20 summit.

We are back in the fall of 2009. Less than a year earlier, when G20 leaders first met in Washington DC, the world economy had been facing its greatest crisis in generations. At the Pittsburgh Summit, the memory of the crisis was still fresh.

The fall of Lehman. The rescue of AIG. The race against the clock to prevent a total meltdown of the financial system.

Leaders from the 20 largest nations in the world had all gone through those fateful crisis days. They shared a conviction that this should not happen again. Ever.

They decided on a massive strengthening of regulation to address the weaknesses in the global financial system and to curb excessive risk taking. And they endorsed the mandate of the newly established Financial Stability Board to coordinate and monitor progress.

Pittsburgh turned the tide. The rest is history. But it is an unfinished history.

For sure, the reforms that were agreed in Pittsburgh did substantially strengthen the global financial system. In recent years, markets have experienced several episodes of turmoil, and we have seen potentially destabilising failures of banks and non-banks. But the core of the system has held up relatively well.

So, one interpretation is that the financial system has proved to be resilient. But that is not entirely true.

Take March 2020 for example. This turmoil was contained both through improved resilience and unprecedented policy actions. Without the combined force of these policy actions, the reforms implemented since 2009 may have not been sufficient to stave off another financial crisis.

And it’s not only in 2020 that unprecedented policy actions were needed. In 2023 the fire brigade had to turn out again.

So, we’ve made progress, but there is much left to do if we want a truly resilient financial system. One that can finance the economy through thick and thin without recourse to extraordinary support. Furthermore, the financial system is evolving, and so must our regulations. Can we keep up the pace? Allow me to share some concerns about that.

First of all, our work to make the banking sector more resilient is not yet complete. For one thing, the final Basel III standards still need to be implemented in many jurisdictions. In the meantime, the banking turmoil in March last year was a reminder that bank runs are not a thing of the past. The demise of Silicon Valley Bank and Credit Suisse not only brought lessons for banks and supervisors. They also highlighted that 13 years after the FSB issued its Key Attributes for Effective Resolution Regimes, authorities still face challenges in dealing with failing banks.

Next to the unfinished agenda in banking, the non-bank financial sector continues to face serious vulnerabilities. Partly as a response to strengthening banking regulation, non-bank financial institutions are playing a larger role in financing the real economy, now accounting for nearly half of total global financial assets.

And as we have seen over the past few years, structural vulnerabilities in the sector have the potential to cause systemic risk. These include liquidity mismatches, leverage, and inadequate margin preparedness. The FSB, working with other standard setters, has done a great deal of work on this issue. We have issued policy recommendations in several key areas.

Drawing up these policy recommendations, however, is not enough to stem systemic risk in NBFI. For that to happen, we must implement them. That means authorities must not only put them into national laws and regulations, they must also have the capacity to operationalize them.

Third, technological innovation continues to shape the way the financial sector functions, and it adds another layer of complexity. Technology can create new interdependencies, for example when many financial institutions rely on the same service providers. It can also increase the speed at which a crisis unfolds.

And technology raises important questions about the regulatory perimeter. Above all technology related risks can exacerbate pre-existing vulnerabilities in the financial system and may create new ones.

Take crypto-assets. This fast-growing market has seen more than its fair share of bankruptcies, liquidity crises and outright fraud, even as its links with traditional finance continue to grow. The FSB has issued recommendations to regulate the market for crypto-assets.

The G20 has endorsed these recommendations and, again, they now need to be implemented globally. As you might notice, I’m talking a lot about implementation, because that’s where my concern lies. It seems that, 16 years after Lehman, implementation fatigue has started to set in. Political commitment for maintaining financial stability is usually the highest when the collective memory of the last crisis is still fresh. When this memory starts to fade, there is the risk that financial stability is taken for granted.

Something that can be left to the bureaucrats, to the technicians. Not least because there are so many other policy priorities to deal with for governments. But that would be a mistake.

We do need the involvement of politicians, of lawmakers, because without them, it becomes even harder to implement necessary regulations. After all, financial stability is the foundation for almost all public policy. If financial stability is gone, as a government you can forget about the other policy priorities. You will spend most of your time drawing up rescue plans for an economy in free fall.

So we should not wait for the next crisis. We also need commitment in good times, when the work to develop and implement policy needs to get done. This commitment is even more important in a world that is getting more fragmented, both politically and economically.

I am concerned about our capacity to work together on cross-border challenges in such a world.

During the Global Financial Crisis, policymakers around the globe were able to respond swiftly and effectively. In a fragmented world, such a swift response could become more complicated. This could prove costly because the most important challenges to financial stability are precisely the cross-border issues that we can only solve if we work together.

And to the financial industry I would say: rules that strengthen the resilience of the financial system are in your best interest too. Some in the industry view regulation as a constraint, something that limits profitability and imposes undue costs. But it’s just the other way around.

Financial regulation is not an obstacle, it is an enabler of sustainable, long-term growth. Globally implemented regulation strengthens international financial stability, levels the playing field, and, in turn, enhances the confidence of your shareholders, clients, and counterparties. Strong regulation is not a constraint on the financial industry, it is an asset.

15 years after Pittsburgh, strengthening the financial system is an unfinished history. Partly that comes with the job. The financial system is always evolving, so our policy also needs to evolve.

But, that’s not the only reason. It is also important that authorities finish implementing the measures we’ve all agreed are needed to address existing vulnerabilities. Vulnerabilities that could lead to the next crisis, if they are allowed to persist.

This calls for maintaining our ambition as policy makers, and for law makers to take the agreed policies all the way through to implementation. I wish for us to have the determination and collaborative spirit that the leaders in Pittsburgh collectively felt.

Let’s work together to finish what we started. Let’s stay sharp, focused and committed to preserving financial stability.

And where better to express that commitment than in the city that never sleeps.

FSB Chair sets out the FSB’s work to maintain financial stability amidst technological advancements

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Ref: 23/2024

  • FSB Chair calls for continued momentum in addressing longstanding financial system vulnerabilities related to elevated debt levels and asset valuations, non-bank liquidity and leverage, and asset and funding market interlinkages.
  • Accompanying report on tokenisation finds low adoption in the financial sector to date, but warns that financial stability risks could rise if tokenisation scales up significantly and if identified vulnerabilities are not adequately addressed.
  • Jurisdictions have made progress in implementing the policy and regulatory responses to address the risks of crypto-assets, developed by the IMF, FSB, and standard-setting bodies (SSBs), but challenges remain.

The Financial Stability Board (FSB) today published a letter from its Chair, Klaas Knot, to G20 Finance Ministers and Central Bank Governors, ahead of their meeting on 23-24 October.

Fears over the global economic outlook are easing, with a number of central banks cutting interest rates. The letter warns of vulnerabilities associated with high debt levels and asset prices, the interaction of non-bank liquidity and leverage, and the connections between different asset and funding markets, illustrated by the short-lived market volatility in August.

The letter outlines the work the FSB has undertaken on financial innovation, payments systems, and cyber and operational resilience. It also introduces the reports the FSB is submitting to the G20 addressing these issues, including:

  • The financial stability implications of tokenisation. Tokenisation of assets may have the potential to improve efficiencies and provide access to new markets for investors, but it can also amplify many of the vulnerabilities seen in traditional finance. The FSB report focuses on tokenisation based on distributed ledger technology (DLT), which is the technology used in most tokenisation initiatives. The limited publicly available data on tokenisation suggests that its adoption is still very low but appears to be growing. As such, tokenisation could have implications for financial stability if it scales up significantly, is used to create complex and opaque automated trading products, or if identified vulnerabilities are not adequately addressed through oversight, regulation, supervision, and enforcement. The report sets out some considerations for authorities and international bodies, including ways to address data and information gaps and to increase understanding of how tokenisation and its related features fit into legal and regulatory frameworks and supervisory approaches.
  • The status report on the G20 Crypto-Asset Policy Implementation Roadmap. Jurisdictions have made progress implementing the policy and regulatory responses to crypto-assets developed by the IMF, FSB, and standard-setting bodies (SSBs). The report flags some implementation challenges related to the lack of comprehensive regulation of crypto-asset issuers and service providers; cross-border issues, particularly with respect to offshore jurisdictions; and the lack of specific stablecoin regulatory requirements. The report calls on authorities to advance the implementation of the FSB’s crypto-asset framework, globally. It warns that the prevalence of non-compliance with existing laws and regulations significantly undermines these efforts to implement the FSB framework. Additionally, if risks from cross-border crypto-asset activities in offshore jurisdictions increase, international organisations, SSBs and jurisdictional authorities may need to consider additional tools to promote implementation beyond G20 members.

Other reports being delivered to the G20 meeting include a consultation on a common Format for Incident Reporting Exchange (FIRE); progress reports on the G20 Cross-Border Payments Roadmap and associated indicators, which capture key aspects of the user experience; and a report on depositor behaviour and interest rate and liquidity risks in the financial system, drawing on lessons from the March 2023 banking turmoil.

The letter underlines the critical importance of effective and timely implementation of agreed policies and standards in the interest of global financial stability.

Notes to editors

The FSB report defines “tokenisation” as a process that involves utilising new technologies, such as distributed ledger technology, to issue or represent assets in digital forms known as tokens. The report focuses on tokenisation involving financial assets.

In September 2023, the G20 Leaders endorsed the Crypto-Asset Policy Implementation Roadmap, which is included in the IMF-FSB Synthesis Paper: Policies for Crypto-Assets and lays out both planned and ongoing initiatives by the IMF, the FSB, and relevant SSBs.

The FSB coordinates at the international level the work of national financial authorities and international standard-setting bodies and develops and promotes the implementation of effective regulatory, supervisory, and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with approximately 70 other jurisdictions through its six Regional Consultative Groups.

The FSB is chaired by Klaas Knot, President of De Nederlandsche Bank. The FSB Secretariat is located in Basel, Switzerland and hosted by the Bank for International Settlements.