ウィスパリング同時通訳研究会コミュのThe FSB in 2021: Addressing Financial Stability Challenges in an Age of Interconnectedness, Innovation and Change

Peterson Institute for International Economics, Washington, DC 30 March 2021

Remarks by Randal K. Quarles, Vice Chair for Supervision,

Board of Governors of the Federal Reserve System, Chair, Financial Stability Board

Introduction

Thank you for inviting me today. It’s an honor and a pleasure to speak here at the Peterson Institute, a group that has driven much of the most important discussion of international economic issues over my entire working life. I only wish that we could all gather in person – perhaps soon. A little over 420 years ago, a crowd-pleasing local fabler on a lightly populated island in the North Atlantic made popular a phrase that has entered into our language: “Beware the Ides of March.” Caesar ignored the soothsayer, and the results weren’t good; if recent history is any indication, perhaps we should keep the warning in mind as well. In March 2008, we witnessed a significant domino fall in a chain of events that sparked the Global Financial Crisis (GFC) with the collapse and sale of Bear Stearns. March of the following year saw the nadir of the Dow Jones average – a 50% drop from just over a year earlier. And the margin calls and liquidity crunch in March of 2020, was a salient echo of the other significance of the Ides of March for the Romans: the deadline for settling debts, which have had an unsettling habit of coming due in March in our recent financial history. Indeed, this time last year, both domestically and internationally, the financial regulatory community fortified itself as COVID-19 and related containment measures spread across the globe, what I refer to as the COVID event. The Financial Stability Board (FSB) moved into high gear, holding weekly, and even daily, meetings with the most senior leaders of central banks, finance ministries, and market regulators – to share information and shape a synchronized global approach to the financial stability challenges at hand. This ability to spring into action on short notice is exactly why the FSB was established in the wake of the GFC. Its mandate, to promote international financial stability by coordinating the development of regulatory, supervisory, and other financial sector policies, at a global level, reflected a recognition of the growing interconnectedness across our markets and economies. My focus today will be on the future and the challenges we face going forward – in particular, non-bank financial intermediation, or NBFI, and cross-border payments. These are only a portion of the FSB’s comprehensive work plan, but they are priority areas that will have significant impact on the financial landscape going forward.

NBFI: Vulnerabilities, Interconnection, and Improving Resilience Developing an NBFI Perspective

Since the GFC of 2008, the NBFI sector has grown and evolved considerably, accounting for almost half of all global financial assets at the start of the COVID event. With this growth has come greater interconnectedness and complexity in intermediation chains. Even before the market turmoil of last March, the need to understand the vulnerabilities arising from the banking sector as well as those risks that have moved outside the banking system was viewed as critical to achieving and maintaining financial stability. The March market turmoil helped focus our attention on NBFI and pushed the FSB to give further priority to work in this area. Because of the way this diverse sector is structured, developing an NBFI perspective requires bringing together regulatory, supervisory, and market perspectives and taking a broad view of how our financial ecosystem works. Even ahead of the COVID event, in my role as Chair of the FSB, I formed a high-level group of central bankers and market regulators to oversee and coordinate work on NBFI – which, by March, was clearly a fortunate decision. Under direction of this senior group, the FSB carried out its Holistic Review of the March Market Turmoil (Holistic Review), which examined not only how different sectors of the market were affected, but also how these effects were transmitted throughout the system and which aspects of the financial system structure may have amplified stress.

FSB Focus on March Market Turmoil and Needed Next Steps

The Holistic Review underscored how vulnerabilities in the financial system amplified the economic shocks of the COVID event. In particular, it highlighted the dependence of the system on readily available liquidity, and vulnerabilities if liquidity strains emerge – in money market mutual funds (MMFs) and open-end funds, through margin calls and in core bond markets. Importantly, it provides a high-level view on how these parts of the financial ecosystem operate and transmit risk while under stress.

In my view, one of the most significant findings relates to MMFs. The Holistic Review documented how the extremely high demand for liquidity, combined with a flight-to-safety, triggered a “dash for cash” that hit institutional prime money market funds particularly hard. In the US, prime MMFs publicly offered to institutional investors had outflows of roughly $100 billion, or 30 percent of the funds’ assets, over two weeks in mid-March. This was a faster run, in terms of the percentage of fund assets redeemed, than during the turmoil in September 2008. Similar patterns were also seen in Europe, particularly for US dollar-denominated MMFs. Other funds that are active in short-term funding markets, such as ultrashort bond funds, also saw unprecedented outflows in March. The March market turmoil is the second time in roughly a decade that we have witnessed destabilizing runs on MMFs. More concerning this time, however, is that we had taken steps between these events precisely to reduce the likelihood of such runs. The FSB will publish a report in July for consultation that will set out consequential policy proposals to improve MMF resilience. The proposals should also reduce the likelihood that government interventions and taxpayer support will be needed to halt future MMF runs. This work will also consider the relationship between MMFs and short-term funding markets, with a particular focus on commercial paper and certificate of deposit markets and the impact of dealer behavior. Continued work on other open-end funds, margining and bond market structure, and liquidity will come on the heels of the MMF deliverables. As a first step, the focus will be on enhancing our understanding of vulnerabilities that could emanate from these sectors, including risk transmission channels. Addressing systemic risk in a dynamic sector that continues to evolve is no small feat. I expect policy-related discussions and recommendations to follow the analytical work, though that will likely extend past this year. Although my time is limited to provide more detail, I would like to note that the disruptions in bond markets also raised questions about the role of leveraged investors and the willingness and capacity of dealers to intermediate in times of stress. Work is underway to gather data and analyze dealer behavior to develop a comprehensive view on their impact on financial market functioning and determine whether policy responses are necessary. Turning to a different part of our NBFI work plan, the March market turmoil demonstrated the benefits that central clearing brings for global financial stability. Indeed, central counterparties (CCPs) demonstrated resilience during this tumultuous period. Given their systemic importance, however, we continue to advance work to improve CCP resilience and resolvability, as set out in the FSB 2020 resolution report.3 I am coordinating with the Chairs of the Committee on Payments and Market Infrastructures (CPMI), International Organization of Securities Commissions (IOSCO), and the FSB Resolution Steering Group on shaping these details. We expect to launch a workstream this year aimed at further strengthening the resilience and resolvability of CCPs in default and non-default loss scenarios, including assessing whether any new types of resources would be necessary to enhance CCP resolvability The FSB and other standard-setting bodies have also begun work on margin activity in centrally cleared and non-centrally cleared markets during the peak of the market volatility last year. We observed that margin calls by some CCPs may have been larger than expected. While we need to ensure that CCPs are sufficiently margined as critical nodes in the financial system, clearing members and their clients also need sufficient transparency and predictability to be able to manage their exposures.

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