The Financial Stability Board (FSB) plans to look into the effectiveness of current mechanisms preventing financial institutions from systemic collapse in 2024, according to its Resolution Report.
The paper cites mechanism like the so called “public sector backstop” – aimed at preventing a systemic collapse by ensuring major banks have access to additional funds or support when facing severe financial difficulties. This support can take various forms, including capital injections or loans, and is typically employed to restore confidence in the financial system and avoid widespread economic disruptions.
Additionally, the FSB will focus on aspects pertinent to the resolution of systemic non-globally systemically important banks (non-G-SIBs), including the assessment of systemic significance, resolution planning, and loss-absorbing capacity.
Recognizing the critical role of central counterparties (CCPs) in maintaining financial stability, the FSB emphasized the importance of adequate resources and tools for CCP resolution – which is a plan on how to handle the potential failure or financial distress of a central clearing party. A public consultation, launched in September, seeks to establish a toolbox approach that equips resolution authorities with essential resources.
“Although G-SIBs were the first banks to start on the BCBS 239 compliance journey, there is clearly still much work to do, despite years of effort,” said Joseph Cordahi, investment management strategy director at fintech NeoXam, in a statement. “Banks must undertake even more rigorous stress-testing, covering supervisory scenarios, simulation scenarios based on current portfolios against previous stress periods, and self-developed hypothetical scenarios. The hypothetical scenarios should reflect shocks based on the characteristics of banks’ portfolios, which rely on high-quality in-house data,”.
“If a CCP were to face financial difficulties or fail, it could have significant repercussions for the financial system,” added Jo Burnham, Risk & Margining subject matter expert at OpenGamma, in a statement. “A resolution plan outlining the key steps and measures to be taken to address such a situation is key to ensure the wider stability of the financial system.”