The Financial Stability Board (FSB), G20’s risk watchdog, signals a more vulnerable global franchise system. Regarding the escalating monetary policies and increasing asset prices, the FSB highlighted the growing risk of a financial system breakdown and a possible market crash. This has triggered fears among global policymakers and investors.
The FSB warned that the increase will result in instability
In its recent report, the FSB warned that the recent increase in global share prices and other financial assets may encourage instability in the financial ecosystem.
The FSB has remarked that while the markets may have been resilient in the past, the financial landscape of the present now has
- High valuations
- Geopolitical turbulence
- Uneven economic recovery
These factors are likely to exacerbate the consequences of the next financial crisis.
The FSB’s apprehension comes as the world’s central banks continue to follow different monetary strategies. The U.S. Federal Reserve has taken steps to tighten its policies due to inflation, while the European Central Bank and Bank of Japan continue to maintain easing policies. The FSB has noted that the difference in monetary policies has resulted in “increased volatility and uncertainty in the financial ecosystem, and markets in different parts of the world.
What has the FSB said about the situation at G20?
In a statement, the FSB advised the following:
“The global financial markets are susceptible to shocks that will lead to localized shocks that spiral out of control and bring down the global financial system.”
The FSB is encouraging risk management strategies to protect these systems.
The FSB highlights the potential for a sudden drop in asset prices. With investments at record levels, shifts in policy or slight changes in investor behaviour can easily cause a sell-off. The board also mentioned the increased use of AI and algorithmic trading as potential causes of extreme volatility, particularly when many players in the market use the same models or data.
The recent surge in global asset prices served as the basis for the FSB’s warning
The recent surge in global asset prices, as reported by the Business Post, served as the basis for the FSB’s warning. The FSB stated that the price increases have made markets “vulnerable to sudden corrections.” The FSB acknowledged that weak economic indicators in some regions, coupled with inflation and growing geopolitical risks, have created a fragile economic picture.
Given these risks, the FSB advocates for improved international collaboration with respect to risks, as well as transparency. The board also emphasized that central banks and regulators need to provide accurate, clear guidance to the markets to ensure that no market misinterpretations arise. The board once again highlighted the monitoring of systemic risks and the promotion of financial stability via coordinated actions.
Risk management comes during a period of uncertainty and complexity in the world economy
In navigating a period of uncertainty and increasing complexity of the world economy, risk management and interrelated policies could not be more timely.
During their summit, the G20 finance ministers and central bank governors will discuss the expected topics. Focus includes most likely the impacts and the strategies to minimize the impacts on the reforming and resilient banking systems, the liquidity, and the management.
Unlike the FSB, most of the time, the world economy and the markets could sustain shocks.
Today, the combinations of geopolitical uncertainty, economic policy divergence, and high economic indicators (valuations) are likely to sustain a global shock. All investors and financial institutions should reassess their risk management frameworks, assess risks, and anticipate volatility. It is likely that a new shock will hit the world economy, and it is only a question of time.