April Global Regulatory Brief: Risk, capital and financial stability

Recent periods of financial stress and the proliferation of risks across the financial system are fueling the development of regulatory initiatives to strengthen requirements and promote international best practice. The following policy developments represent a sample of wider regulatory and policy coverage available to Bloomberg Terminal customers. Run REGS <GO> to find out more or contact your Bloomberg representative:

• Japan: JFSA draft principles on Cash-Flow Based Lending
• Hong Kong: HKMA finalizes overhaul of bank stress testing rules
• International: FSB warns on private markets and stability risks
• UK: PRA consults on liquidity framework reforms

Japan – JFSA draft principles on Cash-Flow Based Lending

Summary:

The Japan Financial Services Agency (JFSA) has released draft principles to advance cash-flow based lending ahead of the Act on the Promotion of Cash-Flow Based Lending taking effect on 25 May 2026. The Act introduces enterprise value security rights as a new financing option to support lending based on businesses’ future potential. The draft reflects ongoing policy and legal development work and clarifies expectations for trust, communication, and engagement between businesses and financial institutions. Related supervisory guidelines for major banks and regional and SME lenders will be amended, and public comments are invited before continued stakeholder dialogue.

Context:

Japan has long promoted cash flow‑based lending to support businesses’ growth potential, particularly following the abolition of the Financial Inspection Manual in 2019 and the shift to principles‑based supervision. As corporate investment appetite has strengthened, expectations for lending based on future business prospects have increased. Against this backdrop, the Act on the Promotion of Cash Flow‑Based Lending, effective 25 May 2026, introduces enterprise value security rights.

Key takeaways:

• The JFSA has published draft principles to support cash flow-based lending grounded in businesses’ future potential, in advance of the Act’s entry into force on 25 May 2026.
• The Act on the Promotion of Cash Flow-Based Lending introduces enterprise value security rights as a new financing option to facilitate lending based on future business prospects.
• The draft reflects policy development across legal design and implementation.
• It sets out the basic approach to trust, communication, and engagement between businesses and financial institutions when undertaking cash flow-based lending.
• The document also clarifies the expected use of enterprise value security rights within cash flow-based lending practices.
• Corresponding amendments will be made to the Comprehensive Supervisory Guidelines for Major Banks and for Small and Medium Sized and Regional Financial Institutions.
• Public comments on the draft are invited until 10 May 2026. The JFSA will continue dialogue with a broad range of stakeholders after the comment period to enhance financial inspection and supervisory practices.

Next Step:

Financial institutions are expected to review the draft principles, assess alignment with their lending strategies, and enhance internal frameworks for cash flow-based lending. They should consider the practical use of enterprise value security rights, provide feedback through the public consultation by 10 May 2026, and prepare for forthcoming amendments to supervisory guidelines ahead of the Act’s implementation.

Hong Kong – HKMA finalizes overhaul of bank stress testing rules

The Hong Kong Monetary Authority (HKMA) has issued updated guidance requiring banks to integrate climate, crypto, and geopolitical risks into their stress-testing programmes.

In more detail:
Following a consultation period, the HKMA released the revised Supervisory Policy Manual (SPM) module IC-5 on “stress-testing,” which supersedes the 2012 version. The new framework aligns with Basel Committee principles and addresses modern vulnerabilities, such as digital-driven bank runs and the feedback loops between capital and liquidity stress. Banks must now maintain an independent model validation function and a firm-wide model inventory. Crucially, the board of directors is now explicitly responsible for the programme, moving away from flexible involvement to a mandatory requirement to challenge test methodologies and outcomes.

Key takeaways:

• Expanded risk scope: Mandatory inclusion of climate-related financial risks (physical and transition), cryptoasset exposures, and disruptions stemming from geopolitical tensions.
• Digital liquidity risks: Recognition of “unprecedented” large-scale deposit withdrawals accelerated by social media and digitalization.
• Enhanced governance: The board holds “ultimate responsibility” and must actively challenge the assumptions and processes of the stress-testing program.
• Methodological rigour: New requirements for firm-wide model inventories and independent validation, including “out-of-sample” testing to ensure reliability during crises.
• Strategic integration: Results must now explicitly feed into recovery and resolution planning, beyond traditional capital and liquidity planning.

Next steps:

Authorized Institutions must now align their internal stress-testing architectures with these more rigorous standards, ensuring that results are integrated into their recovery and resolution planning, as well as their strategic business decisions.

International – FSB highlights private markets and stability risks

The Financial Stability Board (FSB) Chair warns in a letter to the G20 that the conflict in the Middle East has created a significant shock to the global economy and increased financial stability risks. The letter says the financial system has so far remained resilient, but a more uncertain environment could cause multiple vulnerabilities to crystallise at the same time.

Context:
The letter was sent by FSB Chair Andrew Bailey to G20 Finance Ministers and Central Bank Governors on 13 April 2026. The FSB says post-crisis reforms have strengthened resilience, but that the current geopolitical shock has made the outlook less predictable.

Key takeaways:

• The FSB warns of a possible “double or triple whammy”, where tighter financial conditions combine with existing weaknesses and trigger broader system stress.
• Sovereign bond markets are identified as a key area of concern because issuance remains historically large, leverage is concentrated among some funds pursuing similar strategies, and disorderly deleveraging could impair liquidity in core markets and generate cross-border spillovers.
• Risk asset valuations remain vulnerable according to the letter. While some prices have already adjusted lower, the FSB says equity and debt risk premia are still compressed relative to historical norms, leaving room for sharper repricing if the macroeconomic outlook deteriorates further.
• Private credit is singled out for close monitoring. The letter says investor sentiment had already weakened before the conflict, with concerns around asset quality, valuations and liquidity, and notes that some funds have faced increased redemption pressure and in some cases used structural redemption limits.
• The FSB identifies three specific areas for further scrutiny in private credit: interlinkages between banks and private credit markets, the creditworthiness of borrowers, and valuation challenges for private credit assets.
• The letter also points to growing connections between private equity, private credit and parts of the life insurance sector, and highlights wholesale funding markets, including repo and foreign exchange derivatives, as potential channels for shock transmission.

Next steps:

• The FSB will continue monitoring whether the current shock causes more than one vulnerability to crystallise at the same time and whether this leads to broader system effects or loss of confidence.
• The FSB also plans for continued monitoring of repo and foreign exchange derivatives markets and will support IAIS work on risks linked to life insurers’ exposures and wider market interconnections.
• The letter reiterates the importance of continuing implementation of agreed international reforms, including Basel III standards.

UK – PRA consults on liquidity framework reforms

The Prudential Regulation Authority (PRA) has issued a Consultation Paper proposing targeted reforms to the UK liquidity framework to improve banks’ ability to monetise liquid assets during stress. The proposals focus on strengthening operational readiness and stress testing without increasing overall liquidity requirements. They primarily affect UK banks and PRA-supervised firms subject to liquidity regulation.

Context:

The consultation builds on lessons from recent episodes of market stress, including rapid deposit outflows, and forms part of the PRA’s broader efforts to modernise prudential standards. It aligns with international regulatory focus on liquidity resilience following the 2023 banking sector volatility.

Key takeaways:

• Focus on monetisation readiness: Firms would be required to assess their stock of liquid assets and identify operational or legal barriers to timely monetisation in stress scenarios.
• Enhanced stress testing: Firms must test their ability to withstand severe liquidity outflows over a short horizon (e.g. within one week), reflecting faster-moving stress dynamics.
• Removal of testing exemptions: Existing exemptions from annual monetisation testing for Level 1 assets (e.g. sovereign bonds) would be removed to ensure all assets can be readily converted to cash.
• Operational preparedness: Firms are encouraged to ensure readiness to access central bank facilities, including having appropriate collateral and processes in place.
• No increase in liquidity buffers: The PRA emphasises that the reforms are intended to improve usability of existing buffers rather than require additional holdings.
• Streamlined reporting: Data collection requirements would be simplified to avoid increasing regulatory reporting burdens.

Next steps:

Consultation deadline is 17 June 2026. The PRA will review feedback and determine final policy measures, including any implementation timelines and transitional arrangements following the consultation period.