CGFS - Activities
The CGFS monitors financial sector developments and analyses their implications for financial stability and central bank policy.
Global financial vulnerabilities
In 2023/24, the CGFS continued to monitor the implications of the high interest rate environment for global financial conditions. For much of the year, volatility in core bond markets reflected market participants' reactions to a broad range of news about the monetary policy stance in advanced economies. In parallel, some EMEs took in stride their divergence from US monetary policy, while others implemented stabilising measures. The overall resilience of EMEs reflected strong fundamentals and early moves to tighten policy.
Looking ahead, CGFS members considered how the evolution of monetary policy stances could affect financial stability. A key concern was that divergence of monetary policy and economic prospects across countries could give rise to adverse spillovers and increase headwinds. Another concern had to do with the build-up of default risk in commercial real estate and in opaque corners of the financial system, such as private credit markets.
Policy analyses
CGFS members discussed experience with macroprudential policies. Such policies seek to build resilience through the financial cycle. Importantly, they help mitigate stress only to the extent that financial institutions feel comfortable to draw on macroprudential buffers accumulated in tranquil times. Careful communication of macroprudential policies is generally seen as important for ensuring their effectiveness and mitigating undesirable side effects.
Episodes of financial turmoil pointed to areas for further policy work. A general view in the CGFS is that financial intermediaries need to have operational readiness to access emergency liquidity assistance and should bear the attendant costs. For internationally active financial institutions, the coordination of liquidity provision across jurisdictions is of the essence. In addition, market information on deficiencies in banks' business models could be useful to prudential authorities.
Exposures to interest rate risk
Overall, households and non-financial corporates have coped well so far with the rise in interest rates. This is despite the fact that policy rate hikes tamed inflation stemming from supply side factors that put downward pressure on incomes and revenues. The resilience reflected the preceding lengthening of debt maturities at fixed rates, buffers of assets, and a favourable labour market and prudential measures. That said, members pointed to pockets of vulnerability to interest rate risk, especially among smaller corporates and low-income households. These pockets of vulnerability could become more general to the extent that a prolonged period of high interest rates results in thinner buffers and large volumes of debt in need of refinancing.
Policies to mitigate housing market risks
Authorities from 14 jurisdictions shared their experience with policies to mitigate the financial stability risks arising from housing markets. The CGFS report that synthesised this experience concludes that the mitigation of boom-bust cycles in these markets requires consistency across a range of policy tools, including tax, planning and land supply. Further, tools that meet objectives without requiring adjustments help to address inaction bias, while open communication about costbenefit trade-offs enhances long-term policy support.
To promote the report and exchange views with non-CGFS central banks, other authorities and academics, the CGFS co-organised a conference with the Bank of France.
Climate risk insurance gap
The CGFS discussed the financial stability and macroeconomic implications of a persistent gap in the insurance of physical climate risks. Insurers and reinsurers have not been willing or able to provide sufficient coverage of such risks, while sovereign backstops in the face of climate-related losses can undermine public finances. Against this backdrop, a key question is whether markets for insurance linked securities could be part of the solution. Members shared views on the extent to which public authorities, including central banks, can help close the insurance gap.
OTC derivatives statistics
Under the auspices of the CGFS, central banks submit to the BIS statistics on over-the-counter (OTC) derivatives. To enhance the analytical usefulness of these data, CGFS members agreed to enhance foreign exchange (FX) derivatives statistics with additional detail on the direction of trade and the country of counterparties.