MNI POLICY: Danger Remains From March Market Squeeze - FSB

The Financial Stability Board is warning Group of 20 leaders to remain on guard against a recurrence of the March squeeze on global fixed income markets, saying it's still unclear what happened and the pandemic means the turmoil could return.

"It's clear that we need to take actions to address these issues," FSB Chair and Fed official Randall Quarles told reporters, adding that some parts of financial markets helped ease strains while others likely made them worse. The report laid out a plan for future work more than specifying reform plans to curb the dangers.

"The protracted nature of the COVID Event requires continued efforts to support financial resilience and ensure a sustained flow of financing to the real economy," according to a letter Quarles sent G20 leaders before their meeting later this week.

The FSB said in a statement that "the March turmoil underscores the need to strengthen the resilience of non-bank financial intermediation," and "the effectiveness of the policy response to COVID-19 critically depends on measures taken remaining in place as long as necessary."

Here are some other highlights of the FSB's "holistic review" of the incident:

• "Global financial conditions have overall continued to ease since the G20 meeting in July on the back of the decisive policy action taken earlier this year," the report said. "Deteriorating credit quality of non-financial borrowers poses risks to the financial sector. The intensification of the pandemic, together with the resulting necessary government containment measures as well as greater uncertainty about its duration, is increasing vulnerabilities in the non-financial sector"
• "These vulnerabilities may increasingly affect banks and the supply of financing to the real economy more generally. Bank capital ratios have held up so far and have allowed banks to continue lending. However, if banks face rising loan losses and a worsening in asset quality, they may be tempted to tighten credit conditions. In addition, further credit ratings downgrades could put bond markets under pressure."
• "It is critical to address potential obstacles to the use of bank capital and liquidity buffers to absorb losses and support lending, while avoiding harmful deleveraging."
• "Global financial conditions have overall continued to ease since the G20 meeting in July on the back of the decisive policy action taken earlier this year. However, risks to global financial stability remain elevated."
• "Central counterparties remained resilient despite market turbulence."
• "Banks may have been unwilling or unable to deploy substantial balance sheet capacity in an uncertain and volatile environment. Dealers also faced difficulties absorbing large sales of assets, amplifying turmoil in short-term funding markets. Market dysfunction was exacerbated by the substantial sales of US Treasuries by some leveraged non-bank investors and foreign holders. Absent central bank intervention, it is highly likely that the stress in the financial system would have worsened significantly."