Strengthening Fundamentals and Adapting to a Dynamic Risk Landscape
IMF News, June 6, 2024
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- Published: June 6, 2024
Financial Stability
- Context: Remarks delivered at the FED-IMF-World Bank 23rd Annual International Conference on Policy Challenges for the Financial Sector (June 6, 2024).
- Macro-financial environment:
- The IMF's latest edition of the Global Financial Stability Report offers a comprehensive assessment of the current state of global financial markets and identifies potential risks and vulnerabilities.
- Even though the global economy has exhibited resilience in the face of multiple shocks, factors continuing to cast shadows of uncertainty include persistent inflationary pressures, tightening financial conditions, and geopolitical tensions.
- Banking sector findings:
- The banking sector has demonstrated remarkable resilience, bolstered by robust capital and liquidity buffers.
- Cautions against complacency: need for continued vigilance and proactive risk management due to potential asset quality deterioration and profitability pressures.
- Nonbank financial intermediation and structural transformations:
- Growing systemic importance of nonbank financial intermediation and increasing interconnectedness with the global banking system require vigilant management of vulnerabilities from leverage and liquidity mismatches.
- Rising prominence of private equity and credit underscores the importance of closing data gaps and intensified monitoring.
- The GFSR highlights macro-financial criticality of the intensifying cybersecurity threats landscape and the profound implications of climate change and sustainability considerations on financial stability.
Implementation of Basel Standards
- Rationale:
- Progress in implementing international standards is central to strengthening supervisory fundamentals.
- Full, consistent, and timely implementation promotes a robust and well-capitalized banking sector better able to withstand shocks and support growth.
- Role of standard-setting and assessment:
- The Basel Committee on Banking Supervision develops and promotes global regulatory standards; its latest reports highlight worldwide progress on Basel III package implementation and stress the importance of full, consistent, and timely implementation.
- The IMF assesses national implementation and robustness of the framework through the Financial Sector Assessment Program (FSAP).
- FSAP assessments of banking regulation and supervision are benchmarked against compliance with the Basel Core Principles for Effective Supervision.
- Principle of proportionality:
- Given the wide range of size, scale, business scope, and complexity across membership, proportionality allows—in individual cases—for analysis of compliance with Basel III and additional guidelines depending on their relevance.
- Ongoing monitoring and guidance:
- Ongoing monitoring and evaluation are significant given evolution driven by nonbank financial intermediation, digitalization of financial services, and climate change.
- The Basel Committee provides guidance on operational resilience and supervision of climate-related financial risks.
On Good Supervision
- Motivation:
- Upgrading supervisory effectiveness should match regulatory upgrades following episodes of bank distress; lessons drawn from banking turmoil in the United States and Switzerland in March 2023 informed the IMF paper "Good Supervision: Lessons from the Field".
- Key findings from FSAP (2012–23 review):
- Evidence suggestive of pervasive imbalance: countries have performed better on capital and liquidity regulation benchmarks than on supervision.
- Many advanced, emerging, and developing economies lack independent bank supervisors with clear safety and soundness mandates, adequate powers, and legal protection.
- Deficiencies in supervisory approaches, techniques, tools, and especially corrective and sanctioning powers are widespread; more acute in areas requiring complex approaches and unconventional tools.
- Supervisory capabilities and actions required:
- Supervisors need strong policy and supervisory tools, rich data sets, proportionately sophisticated methodologies, operational independence with accountability, clear mandates, adequate legal powers, sufficient resources, appropriate skillsets, and rigorous situational awareness.
- Supervisors must take decisive, timely, and consistent action, following up with concrete steps to address and contain existing and emerging risks.
- Good supervision described metaphorically as a construction site where design, material, and skill combine to build a resilient structure.
- Historical lessons and supervisory approach:
- The global financial crisis highlighted the need for supervisors to be assertive and intrusive—demonstrating the will and ability to act.
- The 2012 update of the global standards for banking supervision—the Basel Core Principles—raised expectations for supervisors to account for economic and business trends and the build-up and concentration of risks inside and outside the banking sector.
- “Light touch” supervision has proved unsuccessful, with institutional and systemic distress following and the absence of intrusive and timely supervisory effort blamed ex post.
- Progress and persistent gaps:
- Much progress in risk monitoring, analysis, forward-looking supervisory approaches, and wider adoption of stress tests and business model analysis.
- More than half of the jurisdictions in the IMF sample do not have independent bank supervisors with a clear safety and soundness mandate, sound internal governance, or resources appropriate to their responsibilities.
- Deficiencies remain in supervisory approaches, techniques, tools, and use of corrective and sanctioning powers, complicating timely action on supervisory findings.
- The structural evolution of the financial sector—growth of nonbank financial intermediation, digitalization of finance, and climate change—adds to supervisory challenges and increases the relevance of these weaknesses.
Policy implications and recommendations
- Full, timely, and consistent implementation of Basel standards worldwide to maintain a level playing field and global financial integrity.
- Strengthen supervisory capacity:
- Ensure independent supervisors with clear safety and soundness mandates, legal protection, and adequate resources.
- Enhance supervisory tools, data, methodologies, corrective powers, and sanctioning frameworks.
- Foster operational independence combined with accountability and clear mandates.
- Improve monitoring and data coverage for nonbank financial intermediation, private equity, and credit to close data gaps and intensify monitoring.
- Integrate structural risks into supervisory frameworks:
- Incorporate cyber risk and climate-related financial risk supervision.
- Expand use of stress tests and business model analysis to identify vulnerabilities early.
- Adopt forward-looking, intrusive, and decisive supervisory practices rather than “light touch” approaches to prevent institutional and systemic distress.
Speech by Tobias Adrian, Financial Counsellor and Director of the Monetary and Capital Markets Department, IMF (June 6, 2024).
Content in this bundle
- CHAPTER 2 — The Rise and Risks of Private Credit
- ch3
- wpiea2023181-print-pdf