(Reuters) - Markets are working well again after turmoil in March in response to the COVID-19 pandemic but there are more challenges to come for banks, Financial Stability Board (FSB) Chair Randal Quarles said on Tuesday.
"Credit spreads have narrowed for both investment-grade and high-yield bonds, markets are functioning in an orderly manner, and credit provision to the economy has held up," Quarles told an event in Washington.
"The next phase will inevitably involve an increase in non-performing loans and provisions as demand falls and some borrowers fail," said Quarles, who is also vice chair of the U.S. Federal Reserve.
The FSB coordinates financial regulation for the Group of 20 Economies (G20).
The FSB needs to respond to how the financial sector is changing, with share of bank assets as a percentage of total financial assets dropping from 46% in 2008 to 39% in 2018, Quarles said.
"As non-bank financial institutions increase their market share, risks have moved outside the banking system," he said.
"There may be lessons for us to learn about the framework that we need to apply to this sector, which is different from —and less developed than — the one used for banks."
The FSB will evaluate the rules introduced after the last financial crisis for money market funds, which were once again "front and center in the COVID event," Quarles said.