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BIS Bulletin Addresses Risks in Cryptocurrencies

The Bank for International Settlements issued its Bulletin entitled Addressing the risks in crypto: laying out the options to address the recent failures involving several major crypto firms.  This issues has become increasingly pressing as these emerging markets are going through booms and busts.  While they have not yet threatened financial stability the scale and prominence of these recent failures highlight the need to address the risks before crypto markets can evolve into systemic contagions.

The reports key takeaways are as follows: 

  • The recent high-profile failures of FTX and other crypto firms have re-ignited the debate on the appropriate policy response to address the risks in crypto, including through regulation.
  • The "shadow financial" functions enabled by crypto markets share many of the vulnerabilities of traditional finance. These risks are exacerbated by specific features of crypto.
  • Authorities may consider different – not mutually exclusive – lines of action to tackle the risks in crypto. These include containment or regulation of the crypto sector or an outright ban.
  • Central banks and public authorities could also work to make TradFi more attractive. A key option is to encourage sound innovation with central bank digital currencies (CBDCs).

A copy of the report can be viewed here.

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Bank of International Settlements

Basel Report Documents Complexity of Basel III Reforms

The Basel Committee on Banking Supervision issued its Evaluation of the impact and efficacy of the Basel III reforms noting that the more sophisticated and multi-dimensional framework introduced through Basel III to address a variety of risks to enhance bank resilience came at the cost of greater regulatory complexity.  With respect to this complexity, the report notes a position that has been consistently argued by the World Council that “complex rules applied to simple banking activities may limit competition, giving advantages to larger and more complex banks, potentially providing incentives for banks to become even more complex and aggravating the [too big to fail] problem.”

World Council on numerous occasions to the Basel Committee stated that compliance with overly complex regulations disproportionately affect credit unions as compared to larger more complex financial institutions.  Their findings note that there are several drawbacks to a complex regulatory framework including challenges to capital planning and could lead to spurious risk assessments and a misallocation of capital.

These findings should now be of use to national level-regulators when implementing the Basel III framework who should take a proportional approach to regulations for credit unions, consistent with the proportionality built into the Basel III framework and consistent with other guidance issued by the Basel Committee.

Additionally, the report provides a holistic evaluation of the impact and efficacy of the implemented Basel III reforms assessing whether the implemented reforms have met their intended objectives, in particular of increasing bank resilience and reducing systemic risk. It also examines some potential unintended effects, notably on banks' lending and capital costs.  This report specifically provides evidence on the following:

  • the impact of the capital and liquidity reforms on bank resilience and systemic risk;
  • potential side effects on banks' lending and capital costs; and
  • interactions among elements of the reforms and the regulatory complexity within the Basel Framework.

 A copy of the report can be viewed here.

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Basel

Basel Committee Issues Prudential Treatment of Cryptoassets

The Basel Committee finalized its prudential standard on Cryptoasset Exposures which has been endorsed by the Committee’s oversight body, the Group of Governors and Heads of Supervision. The document sets out the final standard which the Committee has agreed to implement by 1 January 2025. The text will be incorporated into the consolidated Basel Framework shortly. After final incorporation, the standard will need to be adopted by national-level regulators before being applied to financial institutions. 

The Basel Committee stated that “[t]he standard will provide a robust and prudent global regulatory framework for internationally active banks' exposures to cryptoassets that promotes responsible innovation while preserving financial stability.”

The standard requires financial institutions to classify cryptoassets on an ongoing basis into two groups:

  1. Cryptoassets that meet a full set of classification conditions covering tokenized traditional assets and cryptoassets and includes an effective stabilization mechanism;
  2. Unbacked cryptoassets and cryptoassets that fail to meet any of the classification conditions and pose additional and higher risk compated with group one, accompanied by a complicated capital treatment.

A copy of the finalized standard can be viewed here.

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Basel

Basel Committee Outlines 2023-2024 Work Programme

The Basel Committee on Banking Supervision approved its 2023-2024 Work Programme outlining its strategic priorities for its policy, supervision and implementation activities.  The Committee will focus on the following key themes:

  • Emerging risks and horizon scanning
  • Digitalisation of finance
  • Climate-related financial risks
  • Monitoring and review of existing standards and guidance
  • Implementation and evaluation

On digitalization the Committee will focus on the emergence of new entrants/suppliers in the banking system, the use of artificial intelligence and machine learning, big data and governance arrangements. The Committee will also conduct a deep dive analysis on the supervisory implications of Banking as a Service. Further, the Committee will continue to assess bank-related developments in cryptoasset markets, including the role of banks as stablecoin issuers, custodians of cryptoassets and broader potential channels of interconnections with the cryptoasset ecosystem as well as blockchain technology.

On sustainable finance, the Committee will continue to pursue a holistic approach to address climate-related financial risks to the global banking system. This will include work across all three pillars of regulation, supervision and disclosure. This includes considering whether additional regulatory measures are needed to address climate-related risks.

A copy of the work programme can be viewed here.

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Basel

WOCCU Urges Proportionality in FSB’s Cyber Incident Reporting Standard

The World Council of Credit Unions urged the Financial Stability Board to consider the impact of it’s proposed revisions to international standards trying to achieve greater convergence in cyber incident reporting.  The comments came as part of the FSB’s consultation seeking to strengthen and harmonize frameworks surrounding operational resilience and the desire to increase efforts to reign in the effects of cyber incidents.

World Council agreed strongly with aspects of the consultation that are designed to get at the core roots and causes of cyber incidents.  It acknowledged that the findings of the FSB that cyber incidents are growing in frequency and sophistication and the risk of contagion across borders and sectors due to the growing interconnectedness of the financial system is likewise increasing.  It also noted that the FSB’s focus on increasing the sharing of timely and accurate information is well placed to create a system that is effective for incident response, recovery and promoting financial stability. 

World Council expressed concerns, however, that the solutions often called for expensive and extensive regulatory requirements that are not tailored to the size, risk, and complexity of credit unions, noting that credit unions rarely operate on a cross-border basis, are small in size as compared to large banks, and therefore pose little risk of contagion or “spill-over” effects on other countries.  World Council suggested that reporting be limited to simple, but actionable reporting and reporting that could be accomplished through established regulatory reporting without the need to create new bureaucracies.

The FSB is conducting this review at the request of the G20 and the ever increasing concern from regulators about the risk posed by cyber incidents.

A copy of the letter can be viewed here.

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Financial Stability Board

G20 Addresses Key Credit Union Issues in Leaders’ Declaration

The G20 Bali Leaders’ Declaration issued November 15-16 in Bali, Indonesia addresses several issues critical to credit unions.  Issues surrounding Financial Inclusion, Sustainable Finance and Climate Change, Payments, Cryptocurrencies, Women and Vulnerable Populations, Anti-Money Laundering/Combatting the Financing of Terrorism, Cybersecurity and others were addressed.  This key document gives direction to the international standard setting bodies (i.e. Basel Committee, IASB, FATF, FSB, etc.) who will focus their workplans on issues addressed in this document. 

This is significant for credit union as it ultimately will shape regulations adopted at the national level for credit unions.  Of importance is the embrace of addressing financial inclusion which supports the risk-based approach and proportionate legal and regulatory frameworks.  This will assist convincing national-level regulators the importance of properly tailoring rules for credit unions so that they can better serve their members.

The continued focus on payments and achieving faster, cheaper, more transparent, more inclusive cross-border payments continues to receive high emphasis from the G20.  Much work is underway that will have a transformative effect on the payments space.

Finally, climate and sustainable finance and how to transform the world, businesses, society, and others to meet climate goals is a major theme throughout the Declaration.  Ultimately, credit unions will play a role in addressing these changes as well as receiving their accompanying share of regulatory burden. 

A summary of all of the provisions as well as their impact on credit unions can be viewed here.

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G20

Financial Stability Board Heeds WOCCU’s Call for Regulatory Flexibility

The Financial Stability Board (FSB) noted that the gradual withdrawal of relief measures granted during the COVID-19 crisis are best withdrawn gradually. This came as part of the FSB’s report to the G20 looking at financial policies in the wake of COVID-19 aimed at supporting equitable recovery and addressing the effects from scarring in the financial sector.

The report specifically notes the following:

Where jurisdictions have used the flexibility in international standards and are unwinding in a return to the pre-COVID application of international standards, they are generally not encountering any challenges. Some jurisdictions that have unwound their measures note the importance of phasing out these exceptional measures gradually and communicating the timing of such unwinding to financial markets.

FSB consulted on these measures where WOCCU noted in its comment letter that it is clear that national-level regulators should have the flexibility to have an orderly and gradual withdrawal of those COVID-19 related relief measures so as to not create unnecessary shocks to the balance sheets of credit unions. This is particularly prescient given the current global economy, increasing inflation, the effects from the conflict in Ukraine and many other localized events.

This guidance provides clear direction that national-level regulators can and should use flexibility in unwinding relief measures for credit unions.

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Financial Stability Board

European Council Reaches Position on CRD and CRR Amendment Proposals

On November 8, 2022, the European Council reached a decision on its general approach to Basel III regulatory reforms, namely proposals on amendments to the capital requirements directive (CRD) and the capital requirements regulation (CRR). The Council hopes that by implementing these reforms, it will “boost the resilience of banks operating in the Union and strengthen their supervision and risk management”.

The “output floor” which uses internal models to calculate minimum capital requirements, will apply to both individual and group banking levels, however, member states will have discretion, within its own country, to apply the output floor at the highest level of consolidation. In addition to enhanced technical improvements to credit and market risk and several other improvements, the Council’s position on the implementation of Basel III reforms will enhance proportionality rules for small banks, specifically for disclosure requirements as they pertain to small and non-complex financial institutions. The European Commission previously presented its proposal on the review of the CRD and CRR regulations on October 27, 2021-- next steps include negotiations with the European Parliament to finalize a version of the texts and finalizing the implementation of Basel III international agreements into EU law.

More information on the European Council’s position on the proposals amending the CRD and CRR , is available here.

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Basel, Council of the European Union

FSB Publishes Progress Report on Enhancing Non-Bank Financial Intermediation

On November 10, 2022, the Financial Stability Board (FSB) published its progress report on Enhancing the Resilience of Non-Bank Financial Intermediation (NBFI), which was provided to the G20, analyzing NBFI liquidity imbalances during times of financial market stress. The report includes policy proposals directed to issues of systemic risk, especially in light of stressors within the commodities and bond markets; as well as solutions of vulnerabilities identified in “money market funds, open-ended funds, margining practices, bond market liquidity, and cross-border USD funding in emerging market economies (EMEs).” The FSB plans to work with the International Organization of Securities Commissions (IOSCO) to improve short-term funding markets, and any other work to develop the resilience of liquidity provision in core bond markets.

More information on the FSB's progress report to the G20 can be found here.

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Financial Stability Board

European Commission Advances Instant Payments in the EU and EEA Countries

On October 26, 2022, the European Commission adopted legislation it anticipates will make euro based instant payments more accessible in the EU through affordable, secure, and uninterrupted processing. The legislation, which is an amendment to the 2012 Regulation on the Single Euro Payments Regulation (SEPA), applies to all citizens and businesses in the EU and EEA countries that hold a bank account. The speed and ease of instant payments “help to significantly improve cash flow, and bring cost savings for businesses, especially for SMEs, including retailers”, with payments processing at anytime within ten seconds. According the press release from the Commission, only 11% of EU euro credit transfers were made using instant payments at the beginning of 2022, and the Commission hopes to increase that percentage through SEPA. The legislation is part of a commitment made through the Commission's 2020 Retail Payments Strategy, to improve instant payments. 

SEPA is comprised of four requirements:

  • “Making instant euro payments universally available, with an obligation on EU payment service providers that already offer credit transfers in euro to offer also their instant version within a defined period.
  • Making instant euro payments affordable, with an obligation on payment service providers to ensure that the price charged for instant payments in euro does not exceed the price charged for traditional, non-instant credit transfers in euro.
  • Increasing trust in instant payments, with an obligation on providers to verify the match between the bank account number (IBAN) and the name of the beneficiary provided by the payer in order to alert the payer of a possible mistake or fraud before the payment is made.
  • Removing friction in the processing of instant euro payments while preserving the effectiveness of screening of persons that are subject to EU sanctions, through a procedure whereby payment service providers will verify at least daily their clients against EU sanctions lists, instead of screening all transactions one by one.”

More information on the SEPA legislation is available here.

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European Commission

FSB Continues Its Work on Climate-Related Risks

On October 13, 2022, the Financial Stability Board released two reports on climate-related risks that were provided to the G20 Finance Ministers and Central Bank Governors ahead of their October 12-13, 2022 meeting. The reports follow the FSB’s 2021 publication of its Roadmap for Addressing Climate-related Financial Risks, and consist of recommendations for supervisory and regulatory approaches to climate-related risks, and progress made to climate-related disclosures.

The FSB’s final report on Supervisory and Regulatory Approaches to Climate-Related Risks, address “approaches to monitor, manage and mitigate cross-sectoral and system-wide risks arising from climate change and to promote consistent approaches across sectors and jurisdictions”; and the Progress Report on Climate-Related Disclosures, assesses the progress made over the past year by the International Sustainability Standards Board (ISSB) on developing its global baseline climate reporting standard, as well as work by international standard setters (national and regional authorities), and by firms regarding sustainability reporting. The FSB’s goal is to strengthen disclosures so that they are consistent and effective. The Task Force on Climate-Related Financial Disclosures (TCFD), which was created by the FSB, also released a 2022 status report on "TCFD-aligned disclosures”.

The final report on Supervisory and Regulatory Approaches to Climate-Related Risks, highlights:

  • Supervisory and regulatory reporting and collection of climate-related data from financial institutions.
  • System-wide supervisory and regulatory approaches and the extent to which supervisory and regulatory tools and policies address climate-related risk.
  • Early consideration of other potential macroprudential policies and tools.

The Progress Report on Climate-Related Disclosures, highlights:

  • Progress made by the International Sustainability Standards Board (ISSB) in developing its global baseline standard.
  • Actions undertaken by jurisdictions to require or promote climate-related disclosures.
  • Firms’ progress in making climate-related disclosures, as reported in the 2022 TCFD Status Report.

More information on the FSB’s reports on climate-related risks and climate-related disclosures is available here.

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Financial Stability Board

FSB Chair Pens Letter Concerning Financial Stability Challenges

In anticipation of G20 meeting on October 12-13, 2022, in Afghanistan, the Financial Stability Board (FSB) Chair, Klass Knot, drafted a letter to the G20 Finance Ministers and Central Bank Governors regarding challenges to global financial stability. Since the Chair’s previous letter on financial challenges that was released in July, financial conditions have intensified with inflation increasing, issues related commodity markets or hidden leverage growing, and other vulnerabilities contributing to a weakening economic outlook.

The letter maintains that the FSB will continue to work on addressing these issues including a November progress report on strengthening the resilience of non-bank financial intermediation. Other reports on a regulatory framework for crypto-assets, improving cross-border payments, cyber risks, and climate-related financial risks will be made available for the G20 meeting in Afghanistan. The letter also mentions work on “Interoperability between the common global baseline and national and regional jurisdiction-specific requirements”, in addition to a publication of an October 13 status report on the FSB’s Task Force on Climate-related Financial Disclosures’ (TCFD) recommendations. The ISSB rely upon the TCFD's recommendations for its accounting standards, as well as by most FSB jurisdictions as a reference point. The letter also urges action by companies to improve disclosures related to climate-related financial risks.

On October 13, the FSB further plans to release two reports on climate-related financial risks. One report will involve the FSB's recommendations on supervisory and regulatory approaches to climate-related risks subject to stakeholder comments from a public consultation, and the second report will discuss useful and consistent climate-related disclosures.

More information on the FSB’s work on financial stability challenges and the Chair’s letter is available here.

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Financial Stability Board

FSB Publishes Priorities for Enhancing Cross-Border Payments

On October 10, 2022, the Financial Stability Board (FSB) published its Consolidated Progress Report for 2022 and Priorities for the Next Phase of Work, as a next phase for its work under the G20 Roadmap for Enhancing Cross-border Payments. The FSB wants to strengthen external engagement and partnership under the priorities, and plan to deliver both reports to G20 Finance Ministers and Central Bank Governors ahead of their meeting in Washington, DC on October 12-13, 2022. While the work under the 2021 and 2022 Roadmaps was foundational, the current “Roadmap has now reached an inflection point and needs to move to practical initiatives to enhance payment arrangements”. The FSB will focus three priority themes: Payment system interoperability and extension; legal, regulatory and supervisory frameworks; and cross-border data exchange and message standards.

With a 2027 target date, the FSB joins the Bank for International Settlements’ (BIS) the Committee on Payments and Market Infrastructures (CPMI), and other partners to set priorities for cross-border payments that will have the most impact, thereby enhancing the cost, speed, access and transparency of cross-border payments. The FSB has planned a Cross-border Payments Summit that will take place this month with leaders from both private and public sectors participating.

More information on the FSB’s priorities for enhancing cross-border payments is available here.

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Financial Stability Board

WOCCU Urges Flexibility to FSB for COVID-19 Exit Strategies

WOCCU urged the Financial Stability Board to provide maximum flexibility to national level regulators in the withdrawal of relief measures implemented during the COVID-19 pandemic.  The comments cam as part of the Financial Stability Board’s (FSB) consultative report on the Exit strategies to support equitable recovery and address effects from COVID-19 scarring in the financial sector.

WOCCU noted their concern the impact and potential increase in institutional stress that a rapid withdrawal of relief will cause. Due to the consequences of the pandemic, characterized by high levels of unemployment, the deterioration of specific sectors of the economy and the loss of individual purchasing power, and the impact the war in Ukraine, inflation, rising gas prices, and other increasing costs, many financial entities may experience solvency, liquidity, and other problems in the short and medium term. Depending on the reality of each country and individual credit unions, a generalized deterioration in the quality of financial assets could generate a systemic contagion effect in the financial system of a country, or within the credit union sector.

WOCCU has long urged national-level regulators to work closely with credit unions on providing reasonable and attainable plans to restore norms that existed prior to the pandemic.  WOCCU will continue to work with international standard setters and national level regulators as the withdrawal of COVID-19 related relief measures are withdrawn.

A copy of the letter can be viewed here.

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Financial Stability Board

Basel Committee Meets to Discuss Basel Framework and Continuous Work on Climate-Related Risks

On July 14-15, 2022, the Basel Committee held a meeting to discuss several issues including, but not limited to: necessary measures to address climate-related financial risks, risks and vulnerabilities within the global banking system, additional empirical analyses on buffer usability and cyclicality in the Basel framework (the Committee plans to publish an evaluation report), and the approved results of the annual assessment exercise for globally systemically important banks (G-SIBs). The global banking system is currently enduring inflation and other growth inhibiting factors, and the Committee met to discuss its effects. The Committee believes that banks have been resilient due the success of its Basel II reforms and emplore banks and supervisors to "remain vigilant". Moreover, as a follow up to its interim evaluation report in 2021, on early lessons from the Covid-19 pandemic, the Committee plans to release a second report before the G20 Leaders' Summit, taking place in November of this year. In addition to this report, the Committee approved the results of its annual assessment exercise for G-SIBs, which will be submitted to the Financial Stability Board before it publishes a list of G-SIBs for 2022. Most notably, the Committee discussed the assessment and development of “a suite of potential measures – spanning disclosure, supervisory and/or regulatory measures – to address climate-related financial risks to the global banking system.”

More information on the Basel Committee’s July 14-15 meeting is available here.

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Basel

FSI Issues Insights on Supervisory Practices for Assessing Sustainability

Financial Stability Institute (FSI) of the Bank for International Settlements (BIS) issued its Financial Stability Insights report on the supervisory practices for assessing the sustainability of banks’ business models

The report finds that banks rarely become weak overnight, and flaws in business models and strategies are often the root causes of banks' vulnerabilities and failures. While sudden shocks may be the immediate cause of banks' demise, the root causes are generally more structural. If not identified in time and allowed to fester, these vulnerabilities will make a bank's activities increasingly unsustainable, to the point where it becomes non-viable.

The report notes that business model analysis (BMA) is a key component of supervisory frameworks that allows supervisors to identify banks' vulnerabilities at an early stage and helps to ensure their safety and soundness. Where the analysis identifies existing or potential vulnerabilities, the assessment may provide grounds for early supervisory interventions. Therefore, BMA has the potential to enhance bank supervision and make it more effective, proactive and forward-looking.

The paper presents a range of supervisory practices regarding BMAs. In particular, it aims to identify practices that might be relevant to authorities seeking to explicitly introduce BMA in their supervisory review process (SRP). In order to do so, the paper emphasizes practical aspects of BMA, including processes and procedures for developing and conducting a BMA as well as for integrating its outcomes into the overall SRP.

A copy of the report can be viewed here.

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Bank of International Settlements

FSB Issues Letter to G20 Finance Ministers

The Financial Stability Board (FSB) issued its letter to the G20 which is meeting during a time of growing financial stability challenges.  The G20 will have its Leaders’ Summitt in Indonesia in November.

The letter flags that the combination of lower growth, rising inflation and tighter global financial conditions may crystallise pre-existing vulnerabilities in the global financial system or give rise to new ones. In particular: rising indebtedness across sovereigns, non-financial corporates and households; liquidity mismatches in non-bank financial intermediation; and tightening financial conditions affecting Emerging Market and Developing Economies (EMDEs). The letter stresses that with the exit from COVID-19 well underway, it is important to rebuild macroprudential policy space whenever national conditions allow.

The letter outlines risks from commodity markets and notes that the FSB is analysing financial issues in commodity markets and closely monitoring the possible spillovers from commodities markets into the broader global financial system, as part of its ongoing surveillance.

The letter provides an overview of two areas of the FSB’s work for which documents have been submitted to the G20: addressing scarring and exit strategies from COVID-19; and progress under the FSB’s climate roadmap. The letter also provides an update on the FSB’s work on crypto-assets, following the issuance of a public statement on this topic.

A copy of the letter can be viewed here.

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Financial Stability Board

FSB Issues Progress Report on Climate Roadmap

The FSB issued the FSB Roadmap for Addressing Financial Risks from Climate Change: 2022 progress report noting that policy action to address such risks is more urgent than ever. The report notes the increased frequency and intensity of extreme weather and climate-related events, and the intense debate about current and future energy policies in many jurisdictions, highlights that financial risks related to climate change, including transition risks, are not just a long-term issue or tail event.

Effective action continues to rest on strong international coordination. The G20 has asked the FSB to deliver in July 2022 the first of its annual progress reports on the Roadmap. The report summaries the progress across all four blocks of the Roadmap:

  • Firm-level disclosures
  • Data
  • Vulnerabilities analysis
  • Regulatory and supervisory practices and tools

This progress report was prepared in consultation with standard-setting bodies and other relevant international bodies and serves as input into broader international policy considerations, such as at the G20, G7 and UN, as well as to the work under the G20 Sustainable Finance Working Group (SFWG) roadmap on sustainable finance.

A copy of the report can be viewed here.

 

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Financial Stability Board

IASB Publishes Its Priorities for the Next Five Years

The International Accounting Standards Board (IASB) released its Third Agenda Consultation Snapshot and Feedback Statement, outlining its priorities from 2022 to 2026. The Feedback Statement summarized feedback received from a 2021 public consultation, contributing, in large part, to shaping its priorities and work plan. The IASBs key strategic priorities include:

  • Maintaining the strategic direction and balance of the IASB’s activities. These will remain largely the same, but in response to stakeholder feedback, they will increase “efforts in developing digital financial reporting and on improving the understandability and accessibility of IFRS Accounting Standards”.
  • Completing current projects. This will include deliberations on current projects such as Primary Financial Statements, Goodwill and Impairment, as well others that will likely continue for the rest of 2022 and into 2023.
  • Adding intangibles and cash flows to work plan. This will involve a comprehensive review of accounting requirements for intangible assets and review of the accounting requirements for the statement of cash flows and related matters.The IASB also identified areas where they can work in tandem with the International Sustainability Standards Board (ISSB) to create a “connected financial reporting package”.
Included in the IASB’s workplan for 2022-2026 for credit unions, is its work on the IFRS for SMEs Accounting Standard. After analyzing feedback, the IFRS decided to maintain its current levels of focus on this activity. With the help of the SME Implementation Group (SMEIG), the IASB will set requirements under the Second Comprehensive Review of the IFRS for SMEs Accounting Standard and develop educational materials for preparers within SMEs (small-to-medium enterprises) to help them apply the accounting standard. This will hopefully aid credit unions in calculating their expected loss calculations and provide for a lighter touch in the implementation of IFRS 9 (CECL in the United States).

 

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IFRS, International Accounting Standards Board

European Parliament and Council Reach Provisional Agreement on MiCA

On June 30, 2022, the European Parliament and the European Council Presidency reached a provisional agreement on the markets in crypto-assets (MiCA) proposal. The proposal encompasses unbacked crypto-assets issuers, stablecoins, trading venues and crypto-asset wallets. Although national-level regulators have already begun to implement crypto-asset legislation, it is the first time that crypto-assets, crypto-assets issuers and crypto-asset service providers are all under a regulatory framework at the EU level.

The goal of MiCA is to protect consumers from investment risks such as fraud, market manipulation, and insider dealing, as well as hold crypto-asset service providers liable for loss. MiCA also requires relevant crypto-asset players to “declare information on their environmental and climate footprint”, and as a follow up, in two years “the European Commission will have to provide a report on the environmental impact of crypto-assets and the introduction of mandatory minimum sustainability standards for consensus mechanisms, including the proof-of-work.” MiCA further requires a public register of non-compliant crypto-asset service providers to be maintained by the European Banking Authority (EBA). Listed providers with parent companies in high-risk areas for money laundering, as well non-cooperative jurisdictions for tax purposes, are subject to additional checks within the EU AML framework. MiCA also has additional requirements related to stablecoins, non-fungible tokens (NFTs), and crypto-asset service providers (CASPs) authorizations.

The Council and Parliament will need to approve the provisional agreement before in enters a formal adoption procedure. More information on the provisional agreement on MiCA is available here.

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Council of the European Union

EU Reinforces Rules on Crypto Asset Transfers to Reduce the Use of Cryptocurrencies for Crime

On June 29, 2022, the European Council Presidency and the European Parliament reached a provisional agreement and extended the of the scope of a proposal by way of  the "travel rule", which updates transfer of fund rules to include transfer of crypto assets. The rule aims to, “…ensure financial transparency on exchanges in crypto-assets and will provide the EU with a solid and proportional framework that complies with the most demanding international standards on the exchange of crypto-assets, in particular recommendations 15 and 16 of the Financial Action Task Force (FATF), the global money laundering and terrorist financing watchdog.”

The proposal hopes to hold service providers of crypto assets responsible for collecting and providing access to information pertaining to the originators and beneficiaries of those crypto asset transfers in an effort to expand “traceability” as a means to identify and block suspicious transactions, specifically related ML/TF risks. Under the agreement, the GDPR’s data protection rules will continue to apply to the transfer of crypto assets as well as existing sanctions that apply to all natural and legal persons. The provision must undergo confirmation by both the Council and the Parliament before it can be formally adopted.

More information on the provisional agreement is available here.

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Council of the European Union

Basel Discusses AI and Machine Learning

The Basel Committee on Banking Supervision (Committee) issued a newsletter discussing its internal discussions regarding artificial intelligence and machine learning.  The newsletter made the following observations:

  • Banks are increasingly exploring opportunities for using artificial intelligence (AI), including machine learning (ML). 
  • Banks' use of AI/ML presents significant opportunities but can also heighten certain risks and challenges. 
  • The Committee intends to continue exploring banks' use of AI/ML, especially in the areas of explainability, governance, and resilience and financial stability.

The paper notes that banks are increasingly exploring opportunities for using AI/ML. AI/ML technology is expected to increase banks' operational efficiency and also facilitate improvements in risk management. While significant opportunities are emerging from the increasing use of AI/ML in many areas of banking, there are also risks and challenges associated with these techniques.

It notes that given the challenges associated with AI/ML, both supervisors and banks are assessing existing risk management and governance practices to determine whether roles and responsibilities for identifying and managing risks remain sufficient. As with other complex operations and technologies, it is important that banks have appropriately skilled staff, which can include model developers, model validators, model users and independent auditors. 

The Committee is working to develop further insights on this topic with a focus on the following areas:  

  • First, the extent and degree to which the outcomes of models can be understood and explained.
  • Second, AI/ML model governance structures, including responsibilities and accountability for AI/ML-driven decisions.
  • Third, the potential implications of broader usage of AI/ML models for the resilience of individual banks and more broadly, for financial stability. 

A copy of the newsletter can be viewed here.

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Basel

ENCU Touts Benefits of Credit Unions in EU Report on Social Taxonomy

The European Network of Credit Unions urged the Platform on Sustainable Finance of the European Commission to consider credit unions and the credit union not-for-profit cooperative model to be classified as their own social taxonomy based on the social benefits that credit unions provide to society.

The Platform on Sustainable Finance issued its Final Report on Social Taxonomy wherein it is focused on aligning the structure of a suggested social taxonomy more closely to the existing environmental taxonomy.

In the letter ENCU suggests that credit unions should be designated as their own social taxonomy because their cooperative structure lends itself to different behavior than investor-owned financial institutions and that difference in behavior produces substantial benefits to the world’s millions of credit union members, to non-members, and the economy as a whole.

Access to affordable, reliable and self-sustainable financial services improves lives on many different levels and credit unions work to expand services to people of all income levels. This makes credit unions uniquely positioned to drive how the financial services industry can better foster financial inclusion. Credit unions model places the interests of their members top of mind, prioritizing personable, altruistic service. The “people helping people” philosophy is at the cored of their “DNA” which operates to the social benefit of all.  Financial inclusion and the nexus with sustainable communities is embodied by the credit union cooperative model.

The letter also notes the work of Donore Credit Union in Ireland wherein it has documented the social benefits of its credit union to society.  Their study documents that for every EUR 1 equivalent invested into Donore Credit Union, in the region of EUR 10 of social value was created.  This is an astounding number that could only be accomplished by the unique cooperative model afforded by a credit union.

A copy of the ENCU comment letter can be viewed here.

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European Commission

WOCCU Advocated Proportionality Included in Climate-Related Financial Risks Standard

The Basel Committee on Banking Supervision published its Principles for the Effective Management and Supervision of Climate-related Financial Risks. The document forms part of the Committee's holistic approach to addressing climate-related financial risks to the global banking system and seeks to improve banks' risk management and supervisors' practices in this area.

The document outlines numerous principles for addressing climate-related risks that will form the bases of requirements from national level regulators when addressing climate-related risks for financial institutions and credit unions.   The principles outline numerous elements that should be included in national-level rulebooks as follows:

  • internal control framework;
  • capital and liquidity adequacy requirements;
  • a risk management process;
  • management monitoring and reporting requirements;
  • comprehensive management of credit risk requirements;
  • comprehensive management of market, liquidity, operational and other risks, and
  • scenario analyses.

WOCCU commented on this document during the consultation process noting that the principles may result in a significant increase in regulatory burden for smaller, community based deposit taking institutions such as credit unions.  The principle of proportionality is key to allowing credit unions to address climate-related risks, but in a manner appropriate for their size and complexity.

The committee included its strong support of the principle of proportionality by including the following language as follows:

  • The principles seek to accommodate a diverse range of banking systems and are intended to be applied on a proportionate basis depending on the size, complexity and risk profile of the bank or banking sector for which the authority is responsible.
  • Supervisors should set expectations in a manner proportionate to the nature, scale and complexity of relevant banks’ activities.
  • Where appropriate, supervisors should determine that banks have in place a scenario analysis programme that is proportionate to their size, business model and complexity, in order to assess the resilience of their business models and strategies to a range of plausible climate-related outcomes
  • Banks should manage climate-related financial risks in a manner that is proportionate to the nature, scale and complexity of their activities and the overall level of risk that each bank is willing to accept.

This strong embrace of proportionality should provide clear direction to credit union supervisors and regulators to engage in the important and necessary process of tailoring these principles for credit unions in manner that does not impose an unreasonable regulatory burden on credit unions while allowing the regulated entity to address climate-related risks.

A copy of the principles can be viewed here.

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Basel Committee Finalizes Principles for Climate-Related Financial Risks

On May 27, 2022, the Basel Committee met to contend with matters related to climate related financial risks, cryptoassets, G-SIB assessment methodology, and risks and vulnerabilities in the global banking system. Notably, the Committee finalized principles for the effective management and supervision of climate-related financial risks. They finalized a principles-based approach to improve risk management and supervisory practices devised to mitigate risks associated with climate-related financial risks; and these principles were drafted to include proportional application based on a “diverse range of banking systems”.

The Committee further issued a consultation on “the prudential treatment of banks’ cryptoasset exposures” as a follow-up to its consultation released in 2021 on the ‘Prudential treatment of cryptoasset exposures’. The recently released consultation aims to aid in the continued development of a “global minimum prudential framework” to address risks related to cryptoassets. The Basel Committee also reviewed European Banking Union methodologies on cross-border exposures, as well as risk and vulnerabilities to the global banking system in light of the Ukraine conflict.

More information on the Basel Committee’s May 27th meeting is available here.

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