Recommendations for a framework assessing leverage in investment funds

13 December 2019

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Recommendation 1 IOSCO recommends that regulators use the following two-step analysis in assessing and monitoring leverage (“the Leverage Framework”). Step 1 uses measures of leverage to identify and analyse funds that may pose a risk to financial stability (see Recommendation 2). Step 2 involves further analysis of this sub-set of funds (see Recommendation 3). The goal of Step 1 is to provide regulators with a means of efficiently identifying those funds that are more likely to pose risks to the financial system using at least one notional exposure metric as further specified under Chapter Two of the Report. Step 1 provides an approach to how regulators using exposure metrics in various contexts and situations to filter and select a subset of investment funds for further analysis. Step 2 involves a risk-based analysis on the subset of funds identified in Step 1.

Recommendation 2 IOSCO recommends that regulators collect Gross National Exposure (GNE) or adjusted GNE broken down by asset classes, and long and short exposures. Regulators can at their discretion complement the GNE or adjusted GNE analysis with net exposure measures using either a rules-based or analytical-based netting and hedging approach. In their assessment of leverage in funds, which may pose significant leverage-related risks to the financial system, regulators may take action, when and to the extent they deem appropriate.

Recommendation 3 IOSCO recommends that in applying Step 2 of the Leverage Framework each regulator determines its own approach to defining appropriate risk-based measures to further analysing funds identified under Step 1, that may potentially pose significant leverage-related risks to the financial system. In conducting their Step 2 analysis, taking into account the fund’s characteristics and potential market risk, counterparty risk, or liquidity risks, as appropriate, regulators may consider using the leverage-related risk measures that are common across jurisdictions, as further detailed for illustration purposes and in a non-exhaustive manner in Appendix C of the Report.

Recommendation 4 IOSCO recommends that jurisdictions that do not already make the following leverage data publicly available do so, or provide this information to IOSCO for publication on a yearly basis:

  1. GNE or adjusted GNE aggregated by asset class, including long and short exposures for funds assessed under Step 1;

  2. Criteria of exclusion used to scope-out funds from Step 1 along with the aggregate amount of assets under management of funds not in scope in proportion to the total assets under management within their jurisdiction

FSB reports consider financial stability implications of BigTech in finance and third party dependencies in cloud services

9 December 2019

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Ref no: 45/2019

The Financial Stability Board (FSB) today published two reports that consider the financial stability implications from an increasing offering of financial services by BigTech firms, and the adoption of cloud computing and data services across a range of functions at financial institutions.

BigTech in finance: Market developments and potential financial stability implications

The entry of BigTech firms into finance has numerous benefits, including the potential for greater innovation, diversification and efficiency in the provision of financial services. They can also contribute to financial inclusion, particularly in emerging markets and developing economies, and may facilitate access to financial markets for small and medium-sized enterprises.

However, BigTech firms may also pose risks to financial stability. Some risks are similar to those from financial firms more broadly, stemming from leverage, maturity transformation and liquidity mismatches, as well as operational risks.

The financial services offerings of BigTech firms could grow quickly given their significant resources and widespread access to customer data, which could be self-reinforcing via network effects. An overarching consideration is that a small number of BigTech firms may in the future come to dominate, rather than diversify, the provision of certain financial services in some jurisdictions.

A range of issues arise for policymakers, including with respect to additional financial regulation and/or oversight. Regulators and supervisors also need to be mindful of the resilience and the viability of the business models of incumbent firms given interlinkages with, and competition from, BigTech firms.

Third-party dependencies in cloud services: Considerations on financial stability implications

Financial institutions have used a range of third-party services for decades, and many jurisdictions have in place supervisory policies around such services. Yet recently, the adoption of cloud computing and data services across a range of functions at financial institutions raises new financial stability implications.

Cloud services may present a number of benefits over existing technology. By creating geographically dispersed infrastructure and investing heavily in security, cloud service providers may offer significant improvements in resilience for individual institutions and allow them to scale more quickly and to operate more flexibly. Economies of scale may also result in lower costs to clients.

However, there could be issues for financial institutions that use third-party service providers due to operational, governance and oversight considerations, particularly in a cross-border context and linked to the potential concentration of those providers. This may result in a reduction in the ability of financial institutions and authorities to assess whether a service is being delivered in line with legal and regulatory obligations.

The report concludes that there do not appear to be immediate financial stability risks stemming from the use of cloud services by financial institutions. However, there may be merit in further discussion among authorities to assess: (i) the adequacy of regulatory standards and supervisory practices for outsourcing arrangements; (ii) the ability to coordinate and cooperate, and possibly share information among them when considering cloud services used by financial institutions; and (iii) the current standardisation efforts to ensure interoperability and data portability in cloud environments.

Notes to editors

The digitalisation of finance has the potential to significantly change the functioning of the global financial system. As part of its ongoing work to analyse structural changes in the financial system, the FSB has already published reports on decentralised financial technologies, crypto-assets, FinTech and market structure in financial services, artificial intelligence and machine learning in financial services, and FinTech credit. It will continue to monitor digitalisation trends and their financial stability implications, in order to assist in harnessing the benefits while mitigating risks.

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 Randal K. Quarles, Governor and Vice Chairman for Supervision, US Federal Reserve; its Vice Chair is Klaas Knot, President of De Nederlandsche Bank. The FSB Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.

BigTech in finance: Market developments and potential financial stability implications

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This report considers the financial stability implications of BigTech firms as they expand into offering financial services. Their entry into finance has numerous benefits, including the potential for greater innovation, diversification and efficiency in the provision of financial services. They can also contribute to financial inclusion, particularly in emerging markets and developing economies, and may facilitate access to financial markets for small and medium-sized enterprises.

However, BigTech firms may also pose risks to financial stability. Some risks are similar to those from financial firms more broadly, stemming from leverage, maturity transformation and liquidity mismatches, as well as operational risks.

The financial services offerings of BigTech firms could grow quickly given their significant resources and widespread access to customer data, which could be self-reinforcing via network effects. An overarching consideration is that a small number of BigTech firms may in the future come to dominate, rather than diversify, the provision of certain financial services in some jurisdictions.

A range of issues arise for policymakers, including with respect to additional financial regulation and/or oversight. Regulators and supervisors also need to be mindful of the resilience and the viability of the business models of incumbent firms given interlinkages with, and competition from, BigTech firms.

Third-party dependencies in cloud services: Considerations on financial stability implications

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With the adoption of cloud computing and data services across a range of functions at financial institutions, there are new financial stability implications for authorities to consider. Financial institutions have used a range of third-party services for decades, and many jurisdictions have in place supervisory policies around such services. Yet recently, the adoption of cloud computing and data services across a range of functions at financial institutions raises new financial stability implications.

Cloud services may present a number of benefits over existing technology. By creating geographically dispersed infrastructure and investing heavily in security, cloud service providers may offer significant improvements in resilience for individual institutions and allow them to scale more quickly and to operate more flexibly. Economies of scale may also result in lower costs to clients.

However, there could be issues for financial institutions that use third-party service providers due to operational, governance and oversight considerations, particularly in a cross-border context and linked to the potential concentration of those providers. This may result in a reduction in the ability of financial institutions and authorities to assess whether a service is being delivered in line with legal and regulatory obligations.

This report concludes that there do not appear to be immediate financial stability risks stemming from the use of cloud services by financial institutions. However, there may be merit in further discussion among authorities to assess: (i) the adequacy of regulatory standards and supervisory practices for outsourcing arrangements; (ii) the ability to coordinate and cooperate, and possibly share information among them when considering cloud services used by financial institutions; and (iii) the current standardisation efforts to ensure interoperability and data portability in cloud environments.

Conclusions from the FSB’s SME financing evaluation

3 December 2019

FSB Vice Chair Klaas Knot sets out the conclusions from the FSB’s evaluation of the effects of the post-crisis financial regulatory reforms on the financing of small and medium-sized enterprises. The evaluation was part of a broader FSB examination of the effects of the G20 regulatory reforms on financial intermediation.

Evaluation of the effects of financial regulatory reforms on small and medium-sized enterprise (SME) financing: Final report

29 November 2019 | PDF full text (2 MB)

Summary of document history

Summary of document history

This evaluation examines the effects of the post-crisis G20 reforms on the financing of small and medium-sized enterprise (SMEs). As part of a broader FSB examination of the effects of the reforms on financial intermediation, it is motivated by the need to better understand the effects of the reforms on the financing of real economic activity and their contribution to the G20 objective of strong, sustainable, balanced and inclusive economic growth.

Given that banks are the primary providers of external SME financing, the most relevant reforms implemented to date are the initial Basel III capital and liquidity requirements agreed in 2010. These were the focus of both qualitative and quantitative analysis. Consistent with the FSB evaluation framework, other reforms relevant for SME financing that are at an earlier implementation stage or that are national in nature were only analysed qualitatively.

For the reforms in scope, the evaluation finds no material and persistent negative effects on SME financing in general, although there is some differentiation across jurisdictions. There is some evidence that the more stringent risk-based capital requirements under Basel III slowed the pace and in some jurisdictions tightened the conditions of SME lending at those banks that were least capitalised ex ante relative to other banks. These effects are not homogeneous across jurisdictions and they are generally found to be temporary. The evaluation also provides some evidence for a reallocation of bank lending towards more creditworthy firms after the introduction of reforms, but this effect is not specific to SMEs.

SME lending growth has resumed in recent years, although volumes remain below the pre-crisis level in some jurisdictions. Access to external finance for SMEs also appears to have improved, particularly in advanced economies. Stakeholder feedback suggests that SME financing trends are largely driven by factors other than financial regulation, such as public policies and macroeconomic conditions.

Any potential costs found in this evaluation, which appear limited and transitory, should be framed against the wider financial stability benefits of the G20 reforms estimated in ex ante impact assessments. These studies generally found significant net overall benefits in terms of reducing the likelihood and severity (lost output) of financial crises.

The FSB also published today an overview of responses to its public consultation, and a Technical Appendix providing more information on the empirical analysis that was carried out as part of the evaluation.

Evaluation of the effects of financial regulatory reforms on small and medium-sized enterprise (SME) financing: Technical Appendix to the empirical analysis

FSB publishes final SME financing evaluation report

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Ref no: 44/2019

The Financial Stability Board (FSB) published today its final report on the Evaluation of the effects of financial regulatory reforms on small and medium-sized enterprise (SME) financing, following a public consultation earlier this year. The evaluation is motivated by the need to better understand the effects of the reforms on the financing of real economic activity and their contribution to the G20 objective of strong, sustainable, balanced and inclusive economic growth.

Given that banks are the primary providers of external SME financing, the most relevant reforms implemented to date are the initial Basel III capital and liquidity requirements agreed in 2010. These have been evaluated using both qualitative and quantitative analysis. Consistent with the FSB evaluation framework, other relevant reforms that are at an earlier implementation stage or that are national or regional regulations were only analysed qualitatively.

For the reforms in scope, the evaluation finds no material and persistent negative effects on SME financing in general, although there is some differentiation across jurisdictions. There is some evidence that the more stringent risk-based capital requirements under Basel III slowed the pace and in some jurisdictions tightened the conditions of SME lending at those banks that were least capitalised ex ante relative to other banks. These effects are not homogeneous across jurisdictions and they are generally found to be temporary. The evaluation also provides some evidence for a reallocation of bank lending towards more creditworthy firms after the introduction of reforms, but this effect is not specific to SMEs.

SME lending growth has resumed in recent years, although volumes remain below the pre-crisis level in some jurisdictions. Access to external finance for SMEs also appears to have improved, particularly in advanced economies. Stakeholder feedback suggests that SME financing trends are largely driven by factors other than financial regulation, such as public policies to address SME financing constraints and macroeconomic conditions.

Any potential costs found in this evaluation, which appear limited and transitory, should be framed against the wider financial stability benefits of the G20 reforms estimated in ex ante impact assessments. These studies generally found significant net overall benefits in terms of reducing the likelihood and severity (lost output) of financial crises.

Klaas Knot, FSB Vice Chair and President of De Nederlandsche Bank, who led this work said: “The evaluation provides robust evidence that the post-crisis financial reforms have not led to a material and persistent reduction in SME lending. Indeed, the stronger financial system created by the reforms provides a firm foundation to support SME growth over the long term.”

Notes to editors

The evaluation draws on a broad range of information sources and is based on various types of analyses and extensive stakeholder feedback. These include responses to a public consultation; responses by FSB jurisdictions to a questionnaire; input from stakeholders (SMEs, market participants, trade associations, think-tanks and academics) through a roundtable, a call for public feedback; interviews with market participants in FSB jurisdictions; a review of the literature; and empirical analysis using data from commercial providers and FSB member authorities.

The evaluation was undertaken using the FSB’s framework for the post-implementation evaluation of the effects of the G20 financial regulatory reforms. The framework guides analyses of whether the G20 reforms are achieving their intended outcomes, and helps identify any material unintended consequences that may have to be addressed, without compromising on the objectives of the reforms. This is the third evaluation under the FSB framework.

The FSB also published today an overview of responses to its public consultation, and a Technical Appendix providing more information on the empirical analysis that was carried out as part of the evaluation.

The FSB will launch a public consultation on its fourth evaluation, which examines the effects of too-big-to-fail reforms for systemically important banks, in June 2020. The next FSB evaluation will be on the effects of money market fund reforms; the evaluation will be launched in mid-2020 and be completed by end-2021.

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 Randal K. Quarles, Governor and Vice Chairman for Supervision, US Federal Reserve; its Vice Chair is Klaas Knot, President, De Nederlandsche Bank. The FSB Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.

Evaluation of the effects of financial regulatory reforms on small and medium-sized enterprise (SME) financing: Overview of responses to the consultation

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Summary of document history

Summary of document history

On 7 June 2019, the FSB published an Evaluation of the effects of financial regulatory reforms on small and medium-sized enterprise (SME) financing for public consultation. Interested parties were invited to provide written comments by 7 August 2019. This note summarises the main points from the responses and sets out the main changes that have been made in the evaluation report to address them. The FSB thanks those who took the time and effort to express their views.

Guiding principles for the operationalisation of a sectoral countercyclical capital buffer

27 November 2019

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The Basel Committee on Banking Supervision’s (BCBS) Basel III standard includes a countercyclical capital buffer (CCyB) regime. National authorities can implement a CCyB requirement to ensure that the banking system has an additional buffer of capital to protect against potential future losses related to downturns in the credit cycle.

A sectoral countercyclical capital buffer (SCCyB) is a useful complement to the CCyB. While a bank’s additional capital requirements following the activation of the CCyB depend on total risk-weighted assets, a SCCyB is a more targeted measure allowing national authorities to temporarily impose additional capital requirements that directly address the build-up of risk in a specific sector. The impact of a SCCyB would depend on a bank’s exposure to a targeted credit segment (eg, residential real estate loans). Targeted tools such as the SCCyB may be effective to aid in building resilience early and in a specifc manner, to more efficiently minimise unintended side effects, and may be used more flexibly than broad-based tools.

These guiding principles are intended to support the implementation of a SCCyB on a consistent basis across jurisdictions. The guiding principles are not included in the Basel standards and are only applicable for those jurisdictions that choose to implement them on a voluntarily basis.