Financial Stability Forum concludes its European regional meeting

The Financial Stability Forum (FSF) held a European regional meeting on 22-23 January in Stockholm. Senior representatives from finance ministries, central banks and supervisory and regulatory authorities from 7 FSF member countries and 16 regional non-member countries attended the meeting. Senior officials from international and regional financial institutions also took part. A list of institutions represented is attached.

Participants exchanged views on strengths and vulnerabilities in the global and regional financial systems. They noted the current benign global financial conditions. This has fostered and reflected robust global growth, rising corporate profitability, financial innovation and structural reforms. At the same time, markets are characterised by a very low level of risk premia, especially in credit markets. While this reflects healthy fundamentals and innovation in the management of risk exposures, participants expressed concern that market pricing may not currently incorporate the full range of potential risks. Financial market participants need to take account in their risk analysis and pricing of the full implications of a possible reversal of the current benign conditions, including less liquid markets.

Cross-border financial flows, rapid credit expansion and current and prospective membership in the European Union have provided additional impetus to market growth in Central and Eastern Europe. Financial systems are developing rapidly and are generally in good condition. One by-product of these developments has been rapid growth of private sector credit, a significant share of which in some countries is denominated in foreign currency. Sustained high credit growth largely reflects robust domestic demand, low real interest rates and a catching-up process with the levels of private sector credit in advanced economies. But participants noted several sources of potential risk, including the consequences of strong competition in lending markets, developing credit assessment processes, and exposure to foreign exchange risks by un-hedged borrowers. Participants discussed the effectiveness of policy measures that have been taken to mitigate these risks.

Greater economic integration has been accompanied by an increasingly prominent role for cross-border financial groups. This poses a number of issues for home and host authorities. The presence of foreign banks in domestic financial systems enhances efficiency, improves risk pricing and transfers expertise. Participants discussed the need and scope for enhanced cross-border supervisory co-operation. In particular, they pointed to the need for further improvements in the cross-border exchange of supervisory information and for effective coordination in contingency planning for financial crises.

Participants exchanged views and experiences on prioritisation of financial system reforms, including the role of international standards. Prioritisation of reforms is a particular challenge when countries were faced with multiple reform goals internationally and domestically (including in some cases EU entry requirements), given resource limitations. Participants noted the potential usefulness of exploring region-wide initiatives, such as regional stability analysis, to address common issues and spillover effects faced by countries in the region.

Finally, participants discussed progress in developing domestic capital markets, which would help diversify financing sources and reduce the dependence of some economies on capital inflows. They agreed on the need to further enhance market foundations, including trading infrastructure, legal frameworks supporting collateral and securitisation, and corporate governance requirements.

The full press release including the list of participants in the meeting is available on the FSF website.