Shortcomings With Financial Market Infrastructure Companies’ Business Continuity And Cybersecurity Plans Need To Be Resolved
With rising climate change and cybersecurity risks, which can significantly disrupt financial institutions, legislators and financial regulators urgently need to be more focused on financial markets infrastructure companies (FMIs). here.
The Fitch U.S. Leveraged Loan Default Insight released today by Fitch Ratings, shows that the energy sector’s trailing twelve-month default rate now stands at 9.1%., in comparison to 11.8% in June. This is the first time that the default rate is below double digits since April 2020, and at a far lower level than its 20.3% default probability peak in March of this year. here
The BIS report also points out that “by now, it is clear that cryptocurrencies are speculative assets rather than money, and in many cases are used to facilitate money laundering, ransomware attacks and other financial crimes. Bitcoin in particular has few redeeming public interest attributes when also considering its wasteful energy footprint.” here
“We haven’t had to face a significant cyber event from a financial stability standpoint, and I hope that we don’t. But that’s the thing that I worry the most about.” here.
The March 2020 turmoil has underscored the need to strengthen resilience in the non-bank financial intermediation (NBFI) sector. The impact of COVID-19 has highlighted vulnerabilities in the sector stemming from liquidity mismatches, leverage and interconnectedness, which may have caused liquidity imbalances and propagated stress during the ‘dash for cash’. here.
Successful Use Of Central Bank Digital Currencies Can Only Happen With Global Cooperation And Coordination
It is critical for legislators, central bankers, and financial regulators to coordinate globally the implementation of Central Banking Digital Currencies (CBDC) in order to promote cheaper, faster, inclusive, and more transparent cross-border payment services. Many central banks are comparing and contrasting the advantages and disadvantages of several CBDC designs; however, their focus has been primarily on domestic use. here.
The Financial Stability Board’s analysis identified the limitations of existing data and encourages authorities to work together to develop a concrete plan to rectify the limitations, while taking into account the specific circumstances of each country. Addressing such data gaps will enhance the assessment and monitoring of climate-related risks to financial stability and enable market participants to incorporate climate-related financial risks more effectively in their decisions, including the pricing of credit and allocation of capital here.
U.S. globally systemically important banks are very exposed to climate change risks. Financial regulators must act now. Inaction will be very costly. here.
Climate change events are significant drivers of rising credit, market, operational and liquidity risks in banks and what are referred to as shadow banking, non-banks, or Other Financial Institutions (OFIs): insurance companies, pension funds, asset managers, broker dealers, securities firms, hedge funds, home offices, and private equity firms
Financial Institutions Are On Notice That Weak Governance Can Lead To Ratings Downgrades And Significant Fines
Fitch Ratings analysts expect that “idiosyncratic governance weaknesses to weigh on ratings more often than previously as the tolerance of governance failures from a wide range of stakeholders (e.g. authorities, investors, creditors, customers and employees) declines.” here.
The default rate for below investment grade debt has declined to its lowest level since October 2019. The fact that the default rate for this type of debt, also known as high yield or junk bonds, is declining significantly is signaling an improvement in the credit quality of corporations, that are typically very indebted. here
The physical and transition climate change risk drivers are likely to generate significant costs and financial losses for banks and the banking system globally. Both banks and bank supervisors need to evaluate banks’ existing risk management policies, processes, and procedures to assess whether banks are sufficiently capitalized and liquid to cope with climate-change related risks. here
In 1980, the level of US corporate bonds outstanding was $468 billion, about 16% equivalent of U.S. Gross Domestic Product. Forty years later, the amount of corporate bonds outstanding has grown by over 2,000% to $10.6 trillion; this is 50% of equivalent of GDP. This level of corporate bond debt is the highest in the history of U.S. companies. here
The low interest rate environment in the United States and significant competition amongst banks and other lenders continues to feed into the leveraged loan approval frenzy. $308 billion gross institutional loans were issued the first quarter of this year; this is nearly triple the issuance the last quarter of 2020, $116 billion and significantly above the previous high of $202 billion the first quarter of 2020. here
Addressing climate-change related risks and how they can impact financial institutions is a significant priority in this year’s Group of 20 (G20) presidency. In a letter sent to the G20 Finance Ministers and Central Bank Governors ahead of their April 7 meeting, Financial Stability Board (FSB) Chair Randal Quarles stated that addressing issues related to climate change “is essential to a sustainable recovery from the COVID Event and beyond.” here
Sustained economic recovery is not coming to Latin America until government leaders can get COVID under control. However, it is important for investors to focus not only on near-term COVID vaccination and economic challenges. Precisely because Latin America has lagged other emerging market regions in the economic recovery, with good credit and market risks due diligence, investors can find good opportunities in Latin American fixed income, equity, and foreign exchange markets.