18 February 2022

FSB's Knot: Navigating change in the global financial system: the role of the FSB

This has made the global financial system more vulnerable to adisorderly tightening of financial conditions -- a concern that has been accentuated lately by thereturn of high inflation.

The past three years have seen a fundamental shift in the work of the FSB, from completing the
post-2008 reforms to tackling new challenges for financial stability. Here I think of the crisis
management and ongoing coordination during the pandemic, efforts to tackle vulnerabilities in
non-bank financial intermediation, work to ensure that digital innovation is safe, and addressing
the risks that climate change may create for financial stability. The FSB has coped with this shift
effectively, not least thanks to the continued support of its members and the G20. Yet we mayhave seen only the beginning of the changes that the pandemic, digitalisation and climate
change are bringing to the financial system, and our economies more widely.

Today, I would like to discuss with you my view of the role that the FSB should play to ensure
that the financial system can navigate these changes safely, while providing the financing that
the real economy needs.

The FSB is the centre piece of a multilateral approach to financial stability that until now has
proven very effective. This was best demonstrated by the G20 reforms following the great
financial crisis. These reforms have served the financial system well during the Covid pandemic.
Greater resilience of major banks at the core of the financial system has allowed the system to
absorb, rather than amplify, the economic shock. Without the G20 reforms, governments would
now have to deal with a crippled banking sector in full deleveraging mode, on top of an economy
hit by Covid restrictions. We would have had a crisis within a crisis.

In my view, this success is in large part thanks to the G20’s commitment to dealing with global
challenges together, and to the FSB’s broad membership, its agility and its engagement with
other stakeholders. We will need to fully use these strengths, to which I will return later on, if we
want to tackle the new financial stability challenges successfully.

Let me now discuss the nature of these challenges and what it means for the work of the FSB
in the coming years.

A big challenge for policy makers worldwide at this moment is navigating their economies out of
the Covid pandemic. Two years after its onset, the economic fall-out of the pandemic appears
to be subsiding, and the extraordinary fiscal and monetary support measures that kept
economies afloat are being gradually unwound. But as the economic recovery is proceeding at
an uneven pace across regions, this unwinding process is increasingly likely to be asynchronous.
This creates the potential for cross-border spill-overs. Moreover, since the onset of the
pandemic, both public and private sector debt have increased, while asset prices have grown
amid a search for yield. This has made the global financial system more vulnerable to a
disorderly tightening of financial conditions -- a concern that has been accentuated lately by the
return of high inflation.

The FSB is monitoring and analysing developments closely and stands ready to facilitate global
coordination of financial policies, where necessary, to minimize the risk of a disorderly exit.
This is being underpinned by the FSB’s new financial stability surveillance framework. The
framework enables us to identify global financial vulnerabilities in a systematic manner. It draws
on the collective expertise of the FSB’s broad membership. It places particular emphasis on
incorporating multiple perspectives in the identification and assessment of both current and
emerging vulnerabilities.

At the same time as navigating our economies out of Covid, we need to strengthen resilience in
the non-bank financial intermediation, or NBFI, sector. The financial reform agenda after 2008
focused heavily on banks. Greater resilience of major banks at the core of the financial system
has allowed the system to absorb, rather than amplify, the economic shock from the pandemic.
But as a side-effect, risks in the financial system moved from the banking sector to the non-bank
financial sector. This is what I have previously referred to as the ‘waterbed effect’...

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