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BIS CPMI report Highlights Rapid Development of Retail Fast Payments

The implementation of retail fast payment systems (FPS) across the globe is continuing at a rapid pace, with significant implications for incumbent real-time gross settlement (RTGS) systems, according to a report published today by the Bank for International Settlements' Committee on Payments and Market Infrastructures (CPMI).

Developments in retail fast payments and implications for RTGS systems takes stock of recent developments in retail FPS, discusses the implications for RTGS systems and examines the role of central banks in these systems.

Based on a survey of CPMI member jurisdictions, the report highlights the following findings and implications:

  • global implementation of fast payments is continuing at a rapid pace;
  • the use of a given FPS (ie adoption rate) is generally low in the early stages of its implementation, although some recent FPS have been more rapid in their take-up;
  • FPS can have significant implications for the operations and services of RTGS systems in the same jurisdiction, such as the modification of access criteria and extension of operating hours;
  • FPS are increasingly settling obligations between banks and, where relevant, non-bank FPS participants on a gross (ie payment-by-payment) basis in real time;
  • most jurisdictions have either adopted or are moving towards ISO 20022 as the messaging format for their FPS; and
  • while differences in approaches remain, central banks tend to play important roles in facilitating the operations of FPS.

The report also highlights that designing, implementing and operating an FPS is complex. Challenges include ensuring high system availability (eg during nights and weekends) and reliability requirements.

A copy of the release can be viewed here.

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Bank of International Settlements

Digital Currencies and the Soul of Money

Agustín Carstens, General Manager of the Bank for International Settlements (BIS), outlined his view on the plausible scenarios for the future of money at the Goethe University's Institute for Law and Finance (ILF) conference on "Data, Digitalization, the New Finance and Central Bank Digital Currencies: The Future of Banking and Money.

Carstens offered  three plausible scenarios for the future of money.

  • In the first, big tech stablecoins compete with national currencies and against each other too, fragmenting the monetary system.
  • The second relates to the elusive promise of crypto and decentralised finance, or "DeFi", which claims to offer a financial system free from powerful intermediaries, but may actually deliver something very different.
  • The third realises the vision of an open and global monetary and financial system that harnesses technology for the benefit of all.

Carstens urged development of the third vision noting the design of money has consequences that concern all of society: the integrity and stability of money and payments, market concentration, consumer rights and efficiency. Hence, he urged central bankers to work with other public authorities and private stakeholders to achieve this vision.  He urged innovation in a sound, sustainable way, harnessing the benefits of digital technology in a way that is consistent with our shared values. The goal of ensuring that the financial system builds on the existing governance of money, serves the public interest and works cooperatively with the private sector was of paramount importance.

A copy of the entire speech can be found here.

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Bank of International Settlements

International Advocacy at World Council Releases 2022 Global Regulatory Update

This week the International Advocacy team at the World Council of Credit Unions (World Council) released the 2022 Global Regulatory Update. The update highlighted the leading regulatory issues currently affecting credit unions including sustainable finance, proportionality, financial inclusion, anti-money laundering and countering the financing of terrorism (AML/CFT), payments and digitization. With sustainable finance as the feature of the report, it was noted that we should look forward to regulations that will encourage investments in environmentally responsible products as well as related regulations that govern procedure, including disclosures and reporting requirements.

The updated further underlined other key regulatory factors, including:

  • Proportionality and financial inclusion: G20 and international regulators are beginning to home in on the value of proportionate standards, understanding that reduced regulatory burden will ultimately help to address concerns related to financial inclusion.
  • AML/CFT: AML/CFT regulations continue to place regulatory and compliance burdens on credit unions; however, inter-governmental bodies such as the Financial Action Task Force (FATF) are in line with objectives to alleviate these burdens in order to support financial inclusion by providing a risk-based and proportionate approach to regulation.
  • Payments: Payment reforms are a double-edged sword bringing both disruption and opportunities to credit unions.
  • Digitalization: Evolving regulations surrounding digitization will most likely affect credit unions down the line. As credit unions become more technologically advanced, regulations may prove to be overburdensome; and eventually, credit unions that have not advanced in the digital arena may still find themselves subject to digitization requirements. In the course of time, credit unions will presumably need to jump on the digital bandwagon.

The entire 2022 Global Regulatory Update is available here; and episode 9 of the Global Credit Union Podcast featuring its authors, World Council's Senior Vice President of International Advocacy and General Counsel, Andrew Price, and Assistant General Counsel of International Advocacy, Panya Monford , is available here.

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FATF, G20

Correspondent Banking Relationships Continue to Decline

Correspondent banking trends continued in 2020, with the volume and value of transactions increasing despite the changing payments landscape during the pandemic, according to new data published today by the Committee on Payments and Market Infrastructures (CPMI).

Cross-border payment volume and value increased by 2% and 7%, respectively, in 2020. Correspondent banking relationships declined by 4% from the previous year, taking their total contraction to about 25% between 2011 and 2020.

Following a decline in early 2020, when the beginning of the pandemic induced a bout of market turmoil, the volume and value of correspondent banking rebounded, and the downward trend in relationships stabilised.

Some of the key factors contributing to the rapidly changing payments landscape, such as innovation, are discussed in detail in the Bank for International Settlements March 2020 Quarterly Review.

As the increase in volume and value of transactions shows, correspondent banking relationships continue to play a pivotal role in cross-border payments, despite their worldwide decline.

They offer an important payment channel for firms and households, and a critical loss of relationships could hurt financial inclusion, raise the cost of payments and push payments activity into less regulated areas.

The data was provided by SWIFT based on payment messages from more than 200 countries and jurisdictions.

A copy of the Release can be viewed here.

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Bank of International Settlements

BIS CPMI Report Highlights Challenges with Retail Fast Payments

The implementation of retail Faster Payment Systems (FPS) across the globe is continuing at a rapid pace and may have significant implications for the financial sector pursuant to a report published by the Bank for International Settlements' Committee on Payments and Market Infrastructures (CPMI). The report, Developments in retail fast payments and implications for RTGS systems takes stock of recent developments and discusses the implications for financial institutions and examines the role of central banks in these systems.

The report highlights the following findings and implications:

  • global implementation of fast payments is continuing at a rapid pace;
  • the use of a given FPS (ie adoption rate) is generally low in the early stages of its implementation, although some recent FPS have been more rapid in their take-up;
  • FPS can have significant implications for the operations and services of RTGS systems in the same jurisdiction, such as the modification of access criteria and extension of operating hours;
  • FPS are increasingly settling obligations between banks and, where relevant, non-bank FPS participants on a gross (ie payment-by-payment) basis in real time;
  • most jurisdictions have either adopted or are moving towards ISO 20022 as the messaging format for their FPS; and
  • while differences in approaches remain, central banks tend to play important roles in facilitating the operations of FPS.

The report also highlights that designing, implementing and operating an FPS is complex with challenges including the need to ensure high system availability (eg during nights and weekends) and reliability requirements.

A copy of the release can be viewed here.

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Bank of International Settlements

IMF and World Bank Release Draft Framework for ML/TF Risk Assessment of a Remittance Corridor

The International Monetary Fund (IMF) and World Bank released a Draft Framework for Money Laundering and Terrorist Financing Risk Assessment of a Remittance Corridor, consisting of methodologies with the potential of identifying these corridors as “safe remittance corridors”, which are not intended define an absence of risk but a lower risk level. The goal of the framework is to simplify AML/CFT measures in lower risk remittance transactions For example, If the corridor risk assessment identifies an overall lower level of ML/TF risk, it can be treated as a safe remittance corridor and receive less stringent regulation such as simplified customer due diligence (CDD).

The draft framework serves as “a contribution to the FSB’s Roadmap for Enhancing Cross-Border Payments that was endorsed by G20 Leaders in 2020 and that aims to achieve faster, cheaper, more transparent, and more inclusive cross-border payment services.” The framework also addresses global correspondents’ tendency to terminate and restrict certain entities, as well as the use of de-risking to avoid instead of manage ML/TF. Credit unions have been increasingly subject to this treatment and World Council has consistently advocated for regulators to address the issue of de-risking. In response to the IMF-World Bank draft framework, the Financial Stability Board stated that, “The identification of safe remittance corridors based on a robust corridor risk assessment CRA can reconcile two important policy goals in relation to remittances: first, to support poverty alleviation and economic growth in low-income countries by safeguarding cost-effective transfer mechanisms; and second, to minimize the risk that these mechanisms will be used for criminal or terrorist purposes.”

More information on the IMF-World Bank draft framework is available here.

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Financial Stability Board

US Federal Reserve Board Governor Appointed Chair of the FSB’s Standing Committee on Assessment of Vulnerabilities

On December 10, 2021, it was announced that Lael Brainard, the current Governor of the US Federal Reserve Board, was appointed for a two-year term as Chair of the Financial Stability Board’s (FSB) Standing Committee on Assessment of Vulnerabilities (SCAV). Brainard succeeds Klaas Knot, President of De Nederlandsche Bank, who served as Chair of SCAV since September 2016. The SCAV “monitors and assesses vulnerabilities in the global financial system and proposes to the FSB Plenary actions needed to address them.” These assessments spotlight macro-financial vulnerabilities stemming from structural flaws within the financial system.

More information on the SCAV appointment is available here.

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Financial Stability Board

BIS Releases Commentary Crediting Covid-19 for the Acceleration of Digitalization of Payments

The Bank for International Settlements’ (BIS) Committee on Payments and Market Infrastructures (CPMI) released a commentary entitled, “Covid-19 Accelerated the Digitalisation of Payments“, asserting that the current acceleration of the digitalization payments is a consequence of the Covid-19 pandemic. In summary, the commentary contends that the CPMI’s latest Red Book Statistics demonstrates a consumer shift from cash to digital/contactless payment options at an “unprecedented” rate; and that the value of circulated cash has surged.

Key take aways from the commentary:

  • "The Covid-19 pandemic has boosted the use of digital and contactless payments.
  • Cash in circulation reached a decade high due to a surge in demand for high-value banknotes, suggesting that cash was increasingly held as a store of value rather than for making payments.
  • The pandemic has added to the motivations of central banks to develop central bank digital currencies (CBDCs)."

More information on the CPMI’s commentary is available here.

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Bank of International Settlements

FSB Says Market Participants Should Act Urgently to Prepare for End of Year LIBOR Cessation

In the FSB Statement to Support Preparations for LIBOR Cessation, the Financial Stability Board (FSB) strongly urged market participants to finalize any final steps outlined in the FSB’s Global Transition Roadmap, as most LIBOR panels will end at the end of 2021. While some key USD settings will continue into June 2023 to allow legacy contracts to mature, the FSB states that, “Continued reliance of global financial markets on LIBOR poses risks to global financial stability.” The FSB has ensured participants that in the upcoming months they will continue to monitor the final steps of the LIBOR transition. 

Key details covered in the statement include:

  • “Significant progress has been made in transitioning to Risk-Free Rates (RFRs), but market participants still need to finalise preparations to cease new use of LIBOR by end-2021.
  • Transition should be primarily to overnight RFRs, the most robust benchmarks available, to avoid reintroducing the weaknesses of LIBOR.
  • Active transition of legacy contracts remains the best way for market participants to have control and certainty over their existing arrangements.”

More information on the FSB’s Statement to Support Preparations for LIBOR Cessation is available here.

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Financial Stability Board

IFRS Establishes International Sustainability Standards Board with Basel Committee’s Support

Yesterday the International Financial Reporting Standards (IFRS) Foundation announced that it is establishing the International Sustainability Standards Board (ISSB). The purpose of the ISSB is “to develop global standards to improve the consistency, comparability and reliability of sustainability reporting.” The Basel Committee on Banking Supervision (Basel Committee) declared its endorsement for the ISSB; stated support for “the development of a consistent approach across sectors and minimising regulatory fragmentation”; and promised to “work on the Pillar 3 framework to promote a common disclosure baseline for climate-related financial risks across internationally active banks”.

The Basel Committee believes the ISSB’s mission coincides with its Pillar 3 goals related to climate-related financial risks and plans to analyze Pillar 3 to bolster these risks for a common disclosure baseline traversing all internationally active banks. In coordination with the IFRS Foundation, the Basel Committee intends on advance their analogous objectives by working with other international forums such as the Financial Stability Board (FSB) and the Network for Greening the Financial System (NGFS), “to ensure the prerequisites for a high-quality and globally consistent disclosure framework for climate-related financial risks are in place”.

More information on the Basel Committee’s collaboration with the ISSB can be found here.

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Basel, IFRS

G20 Reaffirms WOCCU Advocated Support for Financial Inclusion

The G20 adopted the G20 Rome Leaders’ Declaration wherein it reaffirmed its support to supporting WOCCU advocated focus on financial inclusion.  WOCCU urged the G20 to focus on the importance of proportionality for the purposes of allowing credit unions to increase financial inclusion. The G20 reaffirmed its commitment to enhancing financial inclusion of vulnerable and underserved segments of society and endorsed the G20 Menu of Policy Options focused on digital financial literacy and financial consumer protection.  The G20 also reiterated its support for the e G20 2020 Financial Inclusion Action Plan which includes Principle 3 which provides for providing an enabling and proportionate legal and regulatory framework for digital financial inclusion, taking into account relevant G20 and international standard setting body standards and guidance.

Their goal is to provide a guide for policymakers in their efforts to lay the ground for new financial inclusion strategies in the post-pandemic world.  Further, the G20 endorsed the risk-based approach of the Financial Action Task Force which aims to promote financial inclusion and ensure legitimate cross-border payments.  The focus on adopting a risk-based approach is welcomed by WOCCU as it focuses on the importance of proportional regulations tailored to the size, risk and complexity of credit unions.

 A summary of the issues addressed by the Leaders’ Declaration are as follows:

Financial Inclusion:   The G20 reaffirmed commitment to enhancing digital financial inclusion of vulnerable and underserved segments of society, including micro, small and medium-sized enterprises (MSMEs), carrying forward the work of the Global Partnership for Financial Inclusion (GPFI) and implementing the G20 2020 Financial Inclusion Action Plan. We endorse the G20 Menu of Policy Options for digital financial literacy and financial consumer and MSME protection “Enhancing digital financial inclusion beyond the COVID-19 crisis”, with the aim to provide a guide for policymakers in their efforts to lay the ground for new financial inclusion strategies in the post-pandemic world.

The G20 also reiterated its support for the  G20 2020 Financial Inclusion Action Plan which includes Principle 3 which provides for providing an enabling and proportionate legal and regulatory framework for digital financial inclusion, taking into account relevant G20 and international standard setting body standards and guidance.

AML/CFT:  The G20 reaffirmed its full support for the Financial Action Task Force (FATF) and the Global Network and recognized that effective implementation of Anti-Money Laundering/Countering the Financing of Terrorism and Proliferation (AML/CFT/CPF) measures is essential for building confidence in financial markets, ensuring a sustainable recovery and protecting the integrity of the international financial system. They stressed the relevance of the risk-based approach of the FATF recommendations with the aim to ensure legitimate cross-border payments and to promote financial inclusion. They confirmed support for strengthening the FATF recommendations to improve beneficial ownership transparency and call on countries to fight money laundering from environmental crime, particularly by acting on the findings of the FATF report.

Sustainable Finance:  The G20 noted that sustainable finance is crucial for promoting orderly and just transitions towards green and more sustainable economies and inclusive societies, in line with the 2030 Agenda for Sustainable Development and the Paris Agreement. They welcomed the establishment of the G20 Sustainable Finance and endorsed the G20 Sustainable Finance Roadmap and the Synthesis Report. The Roadmap, initially focused on climate, is a multi-year action-oriented document, voluntary and flexible in nature, which will inform the broader G20 agenda on climate and sustainability.  The G20 also noted that it is focused on expanding the scope of sustainable finance to include social matters.

Payments:  They welcomed the progress reported against milestones set for 2021 by the G20 Roadmap to enhance cross-border payments, and we endorse the ambitious but achievable quantitative global targets for addressing the challenges of cost, speed, transparency and access by 2027 set out in the FSB report. They called on public authorities and the private sector to work together to make the practical improvements to achieve these goals.

Stablecoins/Digital Currencies:  The G20 reiterated that no so-called “global stablecoins” should commence operation until all relevant legal, regulatory and oversight requirements are adequately addressed through appropriate design and by adhering to applicable standards. They encouraged jurisdictions to progress in the implementation of the FSB High-Level Recommendations, and standard setting bodies to complete their assessment of whether to make any adjustments to standards or guidance in light of the FSB Recommendations. They focused the Committee on Payments and Market Infrastructures, Bank for International Settlements Innovation Hub, IMF and World Bank to continue deepening the analysis on the potential role of central bank digital currencies in enhancing cross-border payments and their wider implications for the international monetary system.

Digitalization:  The G20 recognized the importance of policies to create an enabling, inclusive, open, fair and non-discriminatory digital economy that fosters the application of new technologies, allows businesses and entrepreneurs to thrive, and protects and empowers consumers, while addressing the challenges related to privacy, data protection, intellectual property rights, and security. Mindful of the need to support a better inclusion of MSMEs in the digital economy, they reinforced their actions and international cooperation towards the digital transformation of production, processes, services and business models, also through the use of consensus-based international standards and the improvement of consumer protection, digital skills and literacy.

Gender Equality and Women’s Empowerment. They reaffirmed commitment to gender equality and emphasize the pivotal role of women’s and girls’ empowerment and leadership at all levels for inclusive and sustainable development. The G20 committed to putting women and girls, who have been disproportionately affected by the pandemic, at the core of efforts to build forward better.

International Taxation:  The final political agreement as set out in the Statement on a Two Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy and in the Detailed Implementation Plan, released by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) on 8 October, is a historic achievement through which the world will establish a more stable and fairer international tax system. They called on the OECD/G20 Inclusive Framework on BEPS to swiftly develop the model rules and multilateral instruments as agreed in the Detailed Implementation Plan, with a view to ensure that the new rules will come into effect at global level in 2023.

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G20

FATF Acknowledges Burden of AML/CFT Requirements on the Advancement of Financial Inclusion

The Financial Action Task Force released their, “Cross-Border Payments Survey Results on Implementation of the FATF Standards”, in response to survey created to identify conflicts between AML/CFT rules and implementation, and cross-border payments. According to FATF, “The survey results highlight, among others, that lack of risk-based approach and inconsistent implementation of the AML/CFT requirements increases cost, reduces speed, limits access and reduces transparency.” 

WOCCU commented on to this survey, and to our avail, the FATF report included our assertion that AML/CFT requirements often are not tailored to smaller credit unions and are prohibitive of allowing credit unions into the payments systems. They recognized that “…some jurisdictions restrict the type of customer or product that can be considered lower risk, and whether SDD can be applied, without consideration of ML/TF risks posed in individual situations…”

FATF further acknowledged our concerns that AML/CFT requirements present many problems for credit unions in the payments space including CDD/Member Due Diligence requirements, verifying the identity of beneficial owners, receiving, and sharing customer and transaction information, and the difficulties of having correspondent banking relationships. “CDD requirements, including documentation required should be tailored to the type of client and exercised using a risk-based approach instead of a prescriptive approach. In this scenario, the costs remain disproportionately high to the level of risk posed by, for example, low value transactions (and customers) in certain regions. It can also exclude access for those without the ability to provide certain documents or information, usually the ones at most need of financial inclusion. 

WOCCU will continue to monitor improvements to AML/CFT and cross-border reconciliations.

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FATF

Financial Stability Board Chairs Issues His Final Letter to the G20

Yesterday the FSB published a final letter from FSB Chair, Randall K. Quarles before his three-year terms ends on December 1, 2021, along with a report on lessons learnt from COVID-19 from a financial stability perspective. The letter discusses the significance of the Rome Summit occurring during global economic recovery from the COVID-19 pandemic, as well as structural challenges to the global financial system, which include rapid technological innovations (i.e. crypto-assests), and the impact on climate change on financial stability.

Key lessons from final report on Lessons learnt from the COVID-19 pandemic from a financial stability perspective, include:

  • Market and institutional resilience. The functioning of bank capital and liquidity buffers may warrant further attention; the Basel Committee on Banking Supervision will update its overall analysis on the lessons from the pandemic. The March 2020 market turmoil underscored the need to strengthen resilience in the non-bank financial intermediation sector; the FSB is taking forward a comprehensive work programme. Some concerns about possible excessive procyclicality in the financial system remain; standard-setters will take forward work in procyclicality in margining practices and the Basel Committee will further monitor expected credit loss provisioning.
  • Operational resilience. COVID-19 has highlighted the importance of effective operational risk management being in place before a shock hits. The FSB will develop best practices for the types of information authorities may require related to cyber incidents to promote financial stability. The FSB is also launching further work related to third-party risk management and outsourcing, and will develop expectations for financial authorities’ use in oversight of financial institutions’ reliance on critical service providers.
  • Crisis preparedness. The pandemic highlighted the importance of effective cross-border cooperation, coordination and risk-sharing. The FSB will identify a set of good practices and emerging practices of crisis management groups to enhance preparedness for, and facilitate the management and resolution of, a cross-border financial crisis affecting a global systemically important bank (G-SIB).”

More information on the FSB Chair’s letter to the G20 and the final report can be found here.

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Financial Stability Board

FATF Identifies Lack of Proportionality as Barrier to Financial Inclusion

The Financial Action Task Force (FATF) published its High-Level Synopsis of the Stocktake of the Unintended Consequences of the FATF Standards.  WOCCU commented on this consultation urging focus on the link between proportionality and financial inclusion and further commenting on the issue of De-Risking as they relate to national-level implementation of AML/CFT requirements which are often costly and burdensome for smaller community-based financial institutions such as credit unions.

In their synopsis and recommendations, FATF included the following language:

In general, the misapplication of the FATF Standards, and in particular the failure to use the proportionality that is central to the risk-based approach, can lead to or compound financial exclusion.

WOCCU applauds the acknowledgment and focus on proportionality as it relates to AML/CFT requirements.  WOCCU noted in its comment letter a failure by national-level regulators to apply a risk-based and proportional approach to regulation, especially when given instruction to do so, threatens the ability of financial institutions such as credit unions who provide necessary services to underserved communities.

FATF noted in its synopsis that the failure to properly apply the FATF Standards, and in particular, the failure to use the proportionality that is central to the risk-based approach can lead to financial inclusion. For example, the risk-based tools within the Standards (such as exemptions and simplifications) are underutilised by the countries needing them the most to expand financial inclusion. Secondly, the FATF’s Standards, evaluation and other activities do not adequately encourage authorities, the private sector and assessment teams to understand the impact of financial exclusion on ML/TF risks. 

FATF also noted the problem of De-risking which is “the phenomenon of financial institutions terminating or restricting business relationships with clients or categories of clients to avoid, rather than manage, risk in line with the FATF’s risk-based approach.”  De-risking can result in increased costs of payments and concentration for correspondent banking and remittance services and prevent credit unions from having access to affordable and necessary financial services.

FATF reiterated its commitment to continue to work on what more can be done to mitigate these unintended consequences.  This may entail additional guidance, best practices, training, and possible revisions to the FATF’s Methodology, Procedures and Standards, as well as continuing engagement on the FATF’s work with key external stakeholders.

A copy of the Synopsis can be viewed here.

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FATF

FSI Addresses Role of Climate Related Prudential Policy

A recent speech by Fernando Restoy, Chairman, Financial Stability Institute, Bank for International Settlements addressed the role of prudential policy as it relates to climate change.

Restoy noted that banks are exposed to climate change through two different sets of climate risk drivers:  1.  Through physical risks resulting from the increasing frequency of extreme weather events; and 2. Transactional risk resulting from disruption from the cumulative effects of changes in government policies and in technology and consumer and investor behavior which in turn can erode the value of banks’ credit exposures on the corresponding collateral.  

He notes that the physical and transition risks manifest themselves in the form of credit, market and liquidity risks. In addition, climate-related developments can increase operational risk by affecting business continuity and by giving rise to litigation and reputational losses.

Restoy concludes that the role of prudential regulators is to thoroughly analyze the financial impact of climate change on safety and soundness and to make adjustments to protect the stability of the financial system.  The key will be achieving the right balance between disclosure obligations, supervisory action, and the adjustment of capital requirements if appropriate.

A transcript of the entire speech can be viewed here.

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Bank of International Settlements

WOCCU Applauds G20 Finance Track Focus on Financial Inclusion

The Italian G20 Presidency at the Fourth G20 Finance Ministers and Central Bank Governors meeting (Finance Track) issued its Communique addressing Financial Inclusion (among other topics). 

WOCCU, together with its member credit union associations have placed efforts toward asking the G20 to give direction to national-level regulators to increase financial inclusion vis-à-vis a focus on the importance of proportionality.  The importance of this is that it allows smaller cooperative depository institutions such as credit unions to fulfill their mission and greatly reduce inequalities and promote inclusive growth.  More importantly, proportionality, if applied appropriately, can significantly advance the G20’s goals of promoting financial inclusion by fostering responsible finance through increased access to responsible and affordable financial services offered by credit unions.

WOCCU applauds the G20 focus on financial inclusion and is pleased to see that the Communique issued by the Finance track includes the following passage:

We reaffirm our commitment to enhancing digital financial inclusion of vulnerable and underserved segments of society, including micro, small and medium-sized enterprises (MSMEs), carrying forward the work of the Global Partnership for Financial Inclusion (GPFI) and implementing the G20 2020 Financial Inclusion Action Plan. We therefore endorse the G20 Menu of Policy Options for digital financial literacy and financial consumer and MSME protection “Enhancing digital financial inclusion beyond the COVID-19 crisis”, with the aim to provide a guide for policymakers in their efforts to lay the ground for new financial inclusion strategies in the postpandemic world. We look forward to the review of the G20/OECD High-Level Principles for Financial Consumer Protection in 2022. 

WOCCU will continue to work on this guide for policymakers noting the importance of providing for proportionality that will allow credit unions to maximize its ability to fulfill its mission of serving marginalized, underserved, and financially excluded populations.

A copy of the Communique can be viewed here and a copy of the G20 Menu of Policy Options included in the “Enhancing digital financial inclusion beyond the COVID-19 crisis” can be viewed here.

A recent webinar by WOCCU on Credit Unions and the G20: The Push for Financial Inclusion outlining its efforts with the G20 can be viewed here.

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G20

G20 Finance Track Promotes Aggressive Regulatory Agenda Affecting Credit Unions

The Italian G20 Presidency at the Fourth G20 Finance Ministers and Central Bank Governors meeting (Finance Track) issued its Communique addressing numerous issues that may impact credit unions in the future.  Key passages from the Communique are as follows:  

  1. Financial Inclusion: We reaffirm our commitment to enhancing digital financial inclusion of vulnerable and underserved segments of society, including micro, small and medium-sized enterprises (MSMEs), carrying forward the work of the Global Partnership for Financial Inclusion (GPFI) and implementing the G20 2020 Financial Inclusion Action Plan. We therefore endorse the G20 Menu of Policy Options for digital financial literacy and financial consumer and MSME protection “Enhancing digital financial inclusion beyond the COVID-19 crisis”, with the aim to provide a guide for policymakers in their efforts to lay the ground for new financial inclusion strategies in the postpandemic world. We look forward to the review of the G20/OECD High-Level Principles for Financial Consumer Protection in 2022.  
  1. Payments: We reiterate our commitment to a timely and effective implementation of the G20 Roadmap to enhance cross-border payments. We welcome the progress reported against milestones set for 2021, and we endorse the ambitious but achievable quantitative global targets for addressing the challenges of cost, speed, transparency and access by 2027 set out in the FSB report. 
  1. Sustainable Finance: Three seperate passages are as follows:  1. We agree to coordinate our efforts to tackle global challenges such as climate change and environmental protection, and to promote transitions towards greener, more prosperous and inclusive economies and societies. Sustainable finance is crucial for promoting orderly and just transitions towards greener and more sustainable economies and inclusive societies, in line with the 2030 Agenda for Sustainable Development and the Paris Agreement;  2. We endorse the G20 Sustainable Finance Roadmap and the Synthesis Report prepared by the Sustainable Finance Working Group (SFWG); and 3. It is complemented by the Financial Stability Board (FSB) Roadmap for addressing climate-related financial risks, and is designed to accommodate the evolving sustainable finance landscape and the G20 priorities going forward, taking into account national circumstances. 
  1. Taxation: After the historic agreement reached in July on the key components of the two pillars on the reallocation of profits of multinational enterprises and an effective global minimum tax, we endorse the final political agreement as set out in the Statement on a two-pillar solution to address the tax challenges arising from the digitalisation of the economy and in the Detailed Implementation Plan, released by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). This agreement will establish a more stable and fairer international tax system. We call on the OECD/G20 Inclusive Framework on BEPS to swiftly develop the model rules and multilateral instruments as indicated in and according to the timetable provided in the Detailed Implementation Plan, with a view to ensure that the new rules will come into effect at global level in 2023. 
  1. Digitization: We will continue to explore and address the implications of major economic, social, environmental, technological and demographic challenges including through our recovery strategies. Drawing on the G20 Menu of Policy Options - Digital Transformation and Productivity Recovery, we will continue discussing policies to sustain productivity growth, and to help ensure that the benefits are evenly shared within and across countries and sectors. 
  1. Covid-19: We reaffirm our resolve to use all available tools for as long as required to address the adverse consequences of COVID-19, in particular on those most impacted, such as women, youth and informal and low-skilled workers, and on inequalities. We will continue to sustain the recovery, avoiding any premature withdrawal of support measures, while preserving financial stability and long-term fiscal sustainability, and safeguarding against downside risks and negative spillovers. 
  1. AML//CFT: We reaffirm our full support for the FATF and recognise that effective implementation of AntiMoney Laundering/Countering the Financing of Terrorism and Proliferation (AML/CFT/CPF) measures is essential for building confidence in financial markets, ensuring a sustainable recovery and protecting the integrity of the international financial system. We stress the relevance of risk-based approach in the FATF recommendations with the aim to ensure legitimate cross-border payments and to promote financial inclusion. We confirm our support for strengthening of the FATF recommendations to improve beneficial ownership transparency and call on countries to fight money laundering from environmental crime, particularly by acting on findings of the FATF report. 

The complete Communique from the G20 Finance Track can be viewed here.

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G20

Financial Stability Board Issues Letter to G20 Ahead of October 13 Meeting

Ahead of their October 13, 2021, meeting, the Financial Stability Board (FSB) Chair, Randall K. Quarles, issued a letter to the G20 Finance Ministers and Central Bank Governors in relation to the two reports the FSB has already provided to the G20 regarding the development of a more resilient NBFI sector, and addressing challenges in cross-border payments.

The FSB committed to a multi-year plan to enhance NBFI resilience after market turmoil in March 2020, to focus on, in collaboration with the International Organization of Securities Commission (IOSCO), vulnerabilities in money market funds (MMFs). The FSB also provided the G20 with a final report entitled “Policy Proposals Aimed to Enhance Money Market Fund Resilience”.

Further, as a follow up to the roadmap they previously submitted to the G20 on enhancing cross-border payments, the FSB plans to submit:

More information on the FSB’s letter to the G20 can be found here.

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Financial Stability Board, G20

FSB and IMF Publish Requested Report on G20 Data Gaps Initiative

As a follow up to the Financial Stability Board (FSB) and International Monetary Fund’s (IMF) report entitled, The Financial Crisis and Information Gaps (2009), that discussed information gaps and strengthening data collection, the entities published the Sixth Progress Report - Countdown to December 2021. The first report was phase one of the G20 Data Gaps Initiative (DG-1) where G20 Ministers and Governors requested the FSB and IMF examine information gaps and generate proposals to strengthen data collection processes. The Sixth Progress Report and phase two (DG-2) sets out to “to implement the regular collection and dissemination of reliable and timely statistics for policy use”, as well as provide new recommendations that outline policymaker priorities, including: (i) climate change; (ii) household distributional information; (iii) fintech and financial inclusion data; and (iv) access to private sources of data and administrative data, and data sharing.

The report consists of 20 different recommendations falling under the following headings:

  • Monitoring risk in the financial sector;
  • vulnerabilities, interconnections and spillovers; and
  • data sharing and communication of official statistics. 

More information and highlights of the Sixth Progress Report - Countdown to December 2021 can be found here.

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Financial Stability Board, G20

Financial Stability Board Establishes Financial Stability Surveillance Framework

The Financial Stability Board ( FSB), released their report, “FSB Financial Stability Surveillance Framework” to review vulnerabilities including global, cross-border, and cross-sectoral perspectives, and identify and address current and emerging risks to financial stability.

The framework includes four key principles:

  • “Focus on vulnerabilities that may have implications for global financial stability;
  • scan vulnerabilities systematically and with a forward-looking perspective, while preserving flexibility;
  • recognize differences among countries; and
  • leverage the comparative advantages of the FSB while avoiding duplication of work.”
                                                                        












More information on the FSB Financial Stability Surveillance Framework is available here.

 

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Financial Stability Board

BIS Reports on How COVID-19 Policy Measures Supported Lending

The Bank of International Settlements recently released a report entitled "Covid-19 Policy Measures to Support Bank Lending to review policies designed to support lending.   The report noted that in the wake of the Covid-19 fallout, policymakers enacted a wide range of measures to support the flow of credit. Some measures strengthened banks' lending capacity by preserving their capital and encouraging flexibility in loss accounting. Others, such as state-backed loan guarantees or funding for lending programmes, incentivized banks to use their available capacity.  It found that both types of measures contributed to lending growth.  In particular, the report contained the following key takeaways:

  • Since the start of the Covid-19 pandemic, policy measures have supported lending by enhancing banks' balance sheet capacity and creating incentives for banks to use this capacity.
  • Strong balance sheets allowed banks to accommodate credit line drawdowns at the start of the pandemic, while subsequent policy measures supported further lending.
  • Small and medium-sized enterprises, particularly those in sectors hard hit by the pandemic, expanded their borrowing by more in countries with more generous guarantee programmes.
A copy of the report can be viewed here.
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Bank of International Settlements

WOCCU Supports Early Intervention to Maintain Cooperative Structure During Resolution

The World Council of Credit Unions (World Council) urged the International Association of Deposit Insurers (IADI) to ensure that supervisory authorities prioritize early intervention when resolving cooperatives.  The comments came as part of a consultation by the IADI on in consultation on its Guidance Paper on "Ways to resolve a financial cooperative while keeping the cooperative structure".

World Council supported the findings of the paper to the extent that it identified that in most cases, financial problems at a cooperative depository institution can be addressed at an early stage through prompt corrective action measures including capital building plans through increased earnings retention and/or issuance of capital shares and use of "Net Worth Restoration Plans".  These methods allow a supervisor to prioritize maintaining the assets in a cooperative when resolution is necessary. 

World Council emphasized that the use of these early intervention measures such as Net Worth Restoration Plans, “spinning down” by reducing assets, and supervisory contracts will help promote safety and soundness by helping prudential supervisors correct material weaknesses at financial cooperatives prior to the point of non-viability.

Finally, World Council urged emphasis on the concept that “Demutualization” should only be considered in the rare situation where there are no other financial cooperatives in the jurisdiction that can absorb the problem institution even with supervisory financial assistance or state aid.

A copy of the letter can be viewed here.

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IADI

Basel Committee Focused on Cyber Resilience, Climate and Digitalisation

In separate releases today the Basel Committee on Banking Supervision called for the following:

  • Increased efforts to improve resilience to cyber threats
  • Called for the development of a common set of global sustainability standards as they related to climate-related financial risks; and
  • Discussed the impact of digitalization of finance on the banking system.

To that end, the Basel Committee today published a newsletter calling on banks to improve their resilience to cyber threats noting the widespread adoption of measures to strengthen banks cyber security.

The Committee also noted efforts on climate-related financial risks resulting from the publication of a series of analytical reports on climate-related financial risks in April, it is assessing the extent to which the current Basel framework adequately mitigates such risks.  It is expected that a set of related supervisory practices will be published for consultation later this year and may include additional disclosure, supervisory and/or regulatory measures.

Finally, the Committee is looking at the impact of the ongoing digitalization and disintermediation of finance on the banking system, with an initial focus on retail banks.   It is continuing to assess the supervisory challenges and risks in the competitive landscape for the provision of retail banking, including non-bank financial and technological institutions.

A copy of the press release can be viewed here.

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Basel

Basel III Not Viewed as a "Burden" by Basel Committee

"I don't see Basel III as a burden - I see a compelling case to get it done" said Carolyn Rogers, Secretary General of the Basel Committee on Banking Supervision in the ECB Supervision Newsletter.  This quote came as a part of her comments responding to the question of whether the implementation of Basel III reforms in the aftermath of the pandemic was creating an extra burden on banks (and financial institutions). 

Rogers noted that a healthy, well-capitalised banking system can support an economy, even under severe stress. This is in contrast to what was learned during the great financial crisis, which was that weak banks not only create a financial crisis but they can also amplify the effects of that crisis on the real economy. 

WOCCU's concern with the statement, however, continues to be the indifference by the Basel Committee to smaller, less complex, community based financial institutions such as credit unions where clearly the Basel III reforms have increased complexity, regulatory burden, and in some instances the ability to serve rural or underserved markets.  

A complete copy of the interview can be viewed here.



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Basel

World Council Calls for Pandexit Flexibility from Basel Committee

The World Council of Credit Unions called for flexibility from the Basel Committee on Banking Supervision as the Committt considers the withdrawal of relief measures adopted during the COVID-19 pandemic. “It is important to allow national level regulators a great amount of flexibility to adjust to local conditions and economies when removing COVID-19 relief measures for credit unions.  Otherwise unnecessary shocks to their balance sheets could hinder their ability to serve communities trying to recover from the pandemic,” said WOCCU Sr. VP of Advocacy and General Counsel, Andrew Price.

In particular WOCCU urged the following actions by the Basel Committee that will benefit credit unions and set the framework for a measured and orderly withdrawal of relief measures:

  1. Provide clear direction to national-level supervisors that a measured and orderly withdrawal is appropriate, without establishing any firm timelines or deadlines.
  2. Allow national-level supervisors with ample discretion to adjust the withdrawal of relief based on local conditions and localized circumstances.
  3. Provide direction to national-level supervisors urging patience and leniency erring on the side of leaving a relief measure in place versus the risk of harm that may result from an early withdrawal of a relief measure.
  4. Allow supervisors to work with financial institutions on reasonable capital restoration plans that are appropriate for each institution while holding them harmless from any regulatory violation so long as the plan is being executed in good faith and absent any safety and soundness concern.

Additionally, World Council, in conjunction with FEDEAC, has issued “Financial Strategy to Mitigate the Impact of the COVID-19 Crisis COVID-19 Global Response Committee Technical Paper”[1]; which provides additional insight into the specific areas of concern for credit unions during the COVID-19 recovery period. This is a beneficial tool that credit unions utilize that is comprised of recommendations for strategic methods to manage the impact of the social and economic crisis generated by the COVID-19 pandemic

A full copy of World Council's letter can be viewed here.

 

[1] See, https://www.woccu.org/newsroom/covid19_resources?post_id=2156#2156.

 

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Basel