Other issues for regulatory consideration
Regulators need to address the contagion effects in financial markets arising from non-regulated or significantly less-regulated entities. Some of these may be driving or amplifying market stress, benefiting from central bank market intervention activities, and/or causing stress on more significantly regulated elements of the core funding markets.
Overall, we see the emergence of a dual stress-testing framework: a macro-economic scenario-driven framework, similar to current models; and a broader and far-reaching event-driven framework, similar to what supervisors are discussing with respect to climate change testing, that can be adapted for a range of non-economic derived events. The much longer time-horizons, complexities, uncertainties, and unknowns associated with climate change not only require the development of new stress testing and modeling approaches, but also the constant review of the framework, scenarios, variables, transmission channels, and economic impacts. In other words, a more complex and more agile capability.
A recurring theme across the post-pandemic regulatory landscape will be the need for supervisors and standard setters to identify and collect new, standardized data sets that can inform policymaking that allows the new frontiers of technology, sustainability, and ESG to expand while maintaining appropriate levels of resilience and risk sensitivity.
Compared with previous post-crisis phases, added priority will now be given to diversity, inclusion, and wider corporate responsibility that will require a more holistic approach and broader representation in the regulatory process.