Global financial system still at risk of liquidity stress, market shocks - FSB

The global financial system remains vulnerable to further liquidity stresses and a potential "sudden and sharp" market repricing as economies continue to reel from the Coivd-19 pandemic, the Financial Stability Board (FSB) warned on Wednesday.

Writing to G20 finance ministers and central bank governors ahead of their virtual meeting on July 18, FSB chair Randal Quarles said global financial markets had responded well to a slew of decisive measures aimed at bolstering system-wide liquidity, but that policymakers could not be complacent.

"The crisis is far from over and we must not lose sight of the hard work we must do together to support global recovery," wrote Quarles, who is also vice chair of the US Federal Reserve, which has taken a raft of measures to keep cheap money flowing and prop up ailing companies.

The FSB, an international body that coordinates regulation for the Group of 20 major economies, also on Wednesday published a report that assessed Covid-related financial stability developments and outlines necessary response measures.

"While improving market sentiment has lifted risky asset prices, this may not fully reflect the fact that the pandemic continues and the path of recovery remains highly uncertain. As a result, risky assets remain vulnerable to shifts in the economic outlook," the report says.

The group noted that high levels of corporate debt have grown as companies have borrowed more to navigate the crisis, raising solvency concerns for some borrowers. And while lending to the real economy has generally continued, banks "face a challenging combination of deteriorating credit quality and rising credit demand," it said.

The FSB added that it supported measures, taken by the Fed and European regulators, to allow banks to eat into their excess liquidity buffers to continue lending and that supervisors have agreed that banks will be given sufficient time to restore them.