FSB chair: Invasion of Ukraine has ‘profoundly changed’ global financial markets

Ahead of a meeting today, Klaas Knot, chair of the Financial Stability Board, sent a letter to G20 finance ministers and central bank governors addressing financial stability issues caused by the invasion of Ukraine. The letter also outlined FSB’s plans to address emerging vulnerabilities caused by the conflict.

Areas covered in Knot’s note include links between commodity markets and the rest of the financial system; commodity derivatives markets; cyber response and recovery capabilities; vulnerabilities in emerging markets related to external financing; and the development of a comprehensive picture of leverage in the financial system. Knot said that FSB is responding to current financial stability challenges in two ways: by monitoring current market developments and emerging vulnerabilities, with a focus on resilience, and assessing potential vulnerabilities, focusing on commodity markets, margining and leverage.

Current financial stability challenges “reinforce the importance” of the Basel, Switzerland-based organization’s policy work in financial risk and climate change, the resilience of nonbank financial intermediation (FSB’s term for “shadow banking”), and crypto-assets and cyber risks, according to Knot.

“Russia’s invasion of Ukraine is creating headwinds for the global economic recovery, through highly volatile commodity prices as well as indirectly, through added upward pressure on inflation and interest rates,” he said. “The uncertain economic outlook, alongside rapid structural shifts in the financial system related to digital innovation and climate change, may result in new vulnerabilities that call for coherent policy responses across sectors and jurisdictions.”