Financial Stability Board Calls For Vigilance Of Global Financial System Vulnerabilities

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<br> <br> <br> <br> <br> <br> <br> <br> <br> <br> <br> <br> <br> <br> <br> <br> <br> <br> <br> <br> <br> <br> <br> <br> <br> <br> <br> <br> <br> <br> <br> <br> <br> & nbsp; I applaud Financial Stability Board Chairman Randal Quarles for stating that loosening lending standards and high levels of public corporate debt are vulnerabilities in the global financial system. This is true, not only in developed markets, but also emery ones as well.

I have been writing about and commenting to the press these topics for over five years. Unfortunately, my warnings, Federal Reserve and FDIC officials rating agencies, have been largely ignored by banks and non-banks. & nbsp; According to Moody's Investors, the U.S., and Canada, the quality of covenants hit a new record in the third quarter of 2018 as volumes continue to grow. & nbsp; Since investors have been struggling for decades, covenant protections have been weakening for many years with very few interruptions.

Just last week, in a report entitled "Borrowers push investment capacity to the brink and telegraph their intention to use it," Moody's Investors Covenant Officers Enam Hoque, Derek Gluckman, and Evan Friedman, pointed out that "Borrowers have gained unprecedented flexibility to make investments via the accumulated credit in their builder baskets without satisfying any leverage requirements. "

In his letter to the G20, Quarries also stated that it will remain unknown that the EU will leave the European Union without any agreement, the possibility of a disruptive Brexit remains a distinct possibility. According to Quarles, "Authorities and firms have taken steps to address possible financial stability risks, though some disruption to cross-border services remains possible. A disruptive Brexit could represent an adverse macroeconomic shock, which could be accompanied by significant market volatility. The FSB is monitoring developments, and if necessary, will advise G20 Ministers and Governors on risks, should they crystallize. "& Nbsp; I am pleased that Quarles has been highlighted with regard to the financial system. As I wrote last fallThere are so many interconnections between U.K., European, and U.S. banks do to interbank lending and derivatives transactions, I remain unconvinced that they are fully prepared for a Brexit where the U.K. does not have a formal withdrawal agreement.

Fortunately, Quarries also mentioned that "the growth in non-bank financing represents an increase in the incidence of financial support. -bank financial intermediation. "& nbsp; In my view, not enough has been done in the U.S. Europe to better regulate Non-banks, which now account for almost half of global financial badets. Partly, this is because they are very heterogeneous due to their different size, risk appetite, and long-term objectives. However, part of the challenge with non-banks has also been lack of political will to regulate them. In some countries, financial stability committees lack all the necessary tools to monitor non-banks. And in the U.S., unfortunately, the Financial Stability Oversight Council, which would have the power to better regulate non-banks. & Nbsp; Better supervision of non-banks is critical, particularly as they are very opaque, especially in terms of their participation in Lending and Collateralized Lending Obligation (CLO) markets.

Additionally, the FSB will continue working on enhancing cybersecurity resilience, supporting the Japanese G20 Presidency's focus on financial innovation. Building on its 2017 cyber security and cyber security practices and its 2018 cyber lexicon, during 2019 and 2020 the FSB will develop and report on effective financial institutions, and recovery from, a cyber incident. the June G20 meeting, the FSB plans to deliver progress on the development of effective practices for cyber incident response and recovery.

Quarles' letter FSB agenda themes:

• Finalizing and operationalizing post-crisis reforms– the FSB will work with standard-setting bodies to complete the few remaining items. The FSB will continue to support full, timely and consistent implementation of the agreed post-crisis reforms. Work on addressing structural vulnerabilities from badet management activities will continue.
• Evaluating the effects of the reforms– The FSB is currently examining the effects of small and medium-sized businesses, and has just started to evaluate the effects of too-big-to-fail banking sector reforms. The FSB, is exploring issues around market fragmentation, supporting the Japanese G20.
• Reinforcing outreach to stakeholders– FSB remains committed to improving communication and transparency with other external stakeholders, to increase understanding of FSB 's work and facilitate greater input from a wide array of stakeholders.

I strongly encourage the G20 to add the current weakening of post-crisis reforms to emerging vulnerabilities in the financial system. For example, in continental Europe, French Finance Minister, Bruno Le Maire& nbsp; recommended this weekend that capital requirements be lowered for large banks in which they merge. & nbsp; Not only do we have a lot of money in the past, but we are in the process of being taxed. In the U.S., yesterday's & nbsp;Proposals Comprehensive Capital Analysis Review (CCAR), stress tests, and submission of bank resolution plans (living wills) are particularly worrisome. It is important to understand that they are fully integrated into the U.S., and they are already being rolled back. & Nbsp; In his letter to the G20, Quarles stated that the FSB has just started & nbsp; to evaluate & nbsp; the & nbsp;effects of too-big-to-fail reforms.& Nbsp;Easing financial regulations this late in the credit cycle is dangerous, not only to investors, but especially to taxpayers. The FSB can only be an effective international financial stability systemic standard setter if it continually reminds regulators and financial institutions not to succumb to collective amnesia.

& Nbsp;

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High badet values, high debt, and global lending standards in the United States of America and the United States. Washington DC I applaud the Financial Stability Board Chairman Randal Quarles for stating that Lending standards and high levels of public and corporate debt are vulnerabilities in the global financial system. This is true, not only in developed markets, but also in emerging ones as well.

I have been writing about these topics for over five years. Unfortunately, my warnings, as well as those of the Federal Reserve and FDIC officials and rating agencies, have been largely ignored by banks and non-banks. According to Moody's Investors, the U.S., and Canada, the quality of covenants hit a new record in the third quarter of 2018 as volumes continue to grow. Since they have been struggling for a decade, they have been weakening for many years with very few interruptions.

Just last week, in a report entitled "Borrowers push investment capacity to the brink and telegraph their intention to use it," Moody's Investors Covenant Officers Enam Hoque, Derek Gluckman, and Evan Friedman, pointed out that "Borrowers have gained unprecedented flexibility to make investments via the accumulated credit in their builder baskets without satisfying any leverage requirements. "

In his letter to the G20, Quarries also stated that it will remain unknown that the EU will leave the European Union without any agreement, the possibility of a disruptive Brexit remains a distinct possibility. According to Quarles, "Authorities and firms have taken steps to address possible financial stability risks, though some disruption to cross-border services remains possible. A disruptive Brexit could represent an adverse macroeconomic shock, which could be accompanied by significant market volatility. The FSB is monitoring developments, and if necessary, it should be advised that there is a need for them. As I wrote last fall, there are so many interconnections between U.K., European, and U.S. banks do to interbank lending and derivatives transactions, I remain unconvinced that they are fully prepared for a Brexit where the U.K. does not have a formal withdrawal agreement.

Fortunately, Quarries also mentioned that "the growth in non-bank financing represents an increase in the incidence of financial support. -bank financial intermediation. "In my view, not enough has been done in the US or Europe to better regulate non-banks, which now accounts for almost half of global financial badets. Partly, this is because they are very heterogeneous due to their different size, risk appetite, and long-term objectives. However, part of the challenge with non-banks has also been lack of political will to regulate them. In some countries, financial stability committees lack all the necessary tools to monitor non-banks. And in the U.S., unfortunately, the Financial Stability Oversight Council, which would have the power to better regulate non-banks. Better supervision of non-banks is critical, particularly in their opacity, especially in terms of their participation in leveraged lending and collateralized lending obligations (CLO) markets.

Additionally, the FSB will continue working on enhancing cybersecurity resilience, supporting the Japanese G20 Presidency's focus on financial innovation. Building on its 2017 cyber security and cyber security practices and its 2018 cyber lexicon, during 2019 and 2020 the FSB will develop and report on effective financial institutions, and recovery from, a cyber incident. the June G20 meeting, the FSB plans to deliver progress on the development of effective practices for cyber incident response and recovery.

Quarters' letter to the G20 also raised other key FSB agenda themes:

• Finalizing and operationalizing post-crisis reforms– the FSB will work with standard-setting bodies to complete the few remaining items. The FSB will continue to support full, timely and consistent implementation of the agreed post-crisis reforms. Work on addressing structural vulnerabilities from badet management activities will continue.
• Evaluating the effects of the reforms– The FSB is currently examining the effects of small and medium-sized businesses, and has just started to evaluate the effects of too-big-to-fail banking sector reforms. The FSB, is exploring issues around market fragmentation, supporting the Japanese G20.
• Reinforcing outreach to stakeholders– FSB remains committed to improving communication and transparency with other external stakeholders, to increase understanding of FSB 's work and facilitate greater input from a wide array of stakeholders.

I strongly encourage the G20 to add the current weakening of post-crisis reforms to emerging vulnerabilities in the financial system. For example, in continental Europe, the Mayor recommended this weekend that they merge. Not only do we have a lot of money in the past, but we are in the process of being taxed. In the U.S., Comprehensive Capital Analysis Review (CCAR), stress tests, and submission of bank resolution plans (living wills) are particularly worrisome. It is important to understand that they are fully integrated into the U.S., and they are already being rolled back. In his letter to the G20, Quarles stated that the FSB has just started to evaluate the effects of too-big-to-fail reforms. Easing financial regulations this late in the credit cycle is dangerous, not only to investors, but especially to taxpayers. The FSB can only be an effective international financial stability systemic standard setter if it continually reminds regulators and financial institutions not to succumb to collective amnesia.