FSB: COVID-19 Continues to Shape Financial Sector Vulnerabilities

The outlook for financial stability continues to be dominated by the economic fallout from the COVID-19 pandemic, according to a new report released today by the Basel, Switzerland-based Financial Stability Board.

Different scenarios stemming from COVID-19 could trigger some financial system vulnerabilities, the FSB warned, such as a strong resurgence of the pandemic leading to another round of strict lockdowns. Another, according to the report, could be a rapid tightening in financial conditions after a strong bounce-back in the global economy. “While banking sector resilience is stronger than at the time of the 2008 financial crisis, weaker banks could still come under pressure in either scenario,” the FSB said.

Even as the global economy recovers from the pandemic, the recovery is uneven across economies and “the outlook remains uncertain,” the FSB said in the report, adding that economic uncertainty, easy financing conditions and continued policy support are shaping asset valuations. The report also found that there is evidence of elevated risk-taking among investors, which could add to existing vulnerabilities. The FSB added that there is potential for sudden sharp movements in asset prices in the current environment of high uncertainty.

Among FSB’s priorities for 2021 include coordinating the ongoing COVID-19 policy response, strengthening the resilience of the non-bank financial intermediation, or shadow banking, sector, responding to the challenges of technological innovation, enhancing cross-border payments and financial benchmarks and addressing financial risks from climate change.