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FSB Chair Highlights Key Issues to the G20

The Financial Stability Board (FSB) published a letter from its Chair, Klaas Knot, to G20 Finance Ministers and Central Bank Governors, ahead of the G20 meeting on 28-29 February.

Highlights of the letter are as follows:

  • FSB Chair warns of challenging outlook to global financial stability including debt servicing burdens, stretched asset valuations in some key markets, and leverage and liquidity mismatch in non-bank financial intermediation (NBFI).
  • Chair submits FSB’s revised policy recommendations to address vulnerabilities arising from liquidity mismatch in OEFs and calls on G20 members to implement them as quickly as feasible.
  • Letter outlines key issues the FSB is working on in 2024, including lessons from the March 2023 banking turmoil, NBFI, climate change, digitalisation and enhancing the efficiency of cross-border payments.

In his letter, he warns of the challenging outlook for global financial stability, despite steady economic growth and signs of easing global financial conditions. Debt service challenges could increase, and exposures to sectors facing existing headwinds, like commercial real estate, bear close monitoring. Asset valuations are also stretched in some key markets. Abrupt shifts in market pricing could expose vulnerabilities in the financial system, including those related to leverage and liquidity mismatch in NBFI.

The letter lays out the FSB’s work during 2024 to monitor and address financial system vulnerabilities.

The FSB also noted that it is working to ensure the effective implementation of the international framework provided by the FSB Key Attributes of Effective Resolution Regimes, address the financial stability risks stemming from leverage in NBFI, and analyze the financial stability implications of tokenisation and artificial intelligence. To address growing financial stability risks from cyber incidents, the FSB is designing a format for incident reporting exchange (FIRE) for public consultation.

Finally, the FSB notes that it continues to coordinate international work through the FSB Roadmap to address financial risks from climate change, the G20 Roadmap for enhancing cross-border payments and the G20 Roadmap on crypto-assets. At the request of the Brazilian G20 Presidency, the FSB will also deliver a stocktake on regulatory and supervisory initiatives related to the identification and assessment of nature-related financial risks to the G20 July meeting.

A copy of the release can be viewed here.

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Financial Stability Board

Comment Letter on Digital Fraud and Banking

In response to the Basel Committee on Banking Supervision's discussion paper regarding digital fraud, World Council submitted a comment letter on behalf of the global credit union movement. The Committee's discussion paper requested comments a description of fraud and the transmission channel's into the banking system. It also requested comments on whether there are additional banking initiatives related to digital fraud that should be pursued by the Committee. 

Among suggestions for a more inclusive description of digital fraud impacting credit unions, World Council urged the Committee to explore the methods and ramifications in which the most vulnerable populations are targeted. Digital fraud is another challenge credit unions face in their mission for financial inclusion. World Council requested the Committee consider additional education initiatives related to fraud activity and resources.

Click here to read the comment letter submitted by World Council.  

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Comment Letter, Basel

World Council Submits Comment Letter on Disclosure of Cryptoasset Exposure

World Council has submitted a comment letter on the Basel Committee's public consultation Disclosure of Cryptoasset Exposure. The consultative document proposes a standardized disclosure template that would be required for financial institutions, including credit unions, with cryptoasset exposure beginning in January 2025. The Committee proposed the templates to ensure market discipline and better transparency on risks associated with exposure.  

Similar to other areas of the Basel Framework, World Council requested that proportionality or a more streamlined ability to disclose also be included in the requirements and standard templates. If credit unions decide to explore or take-on cryptoasset exposure in the future it is important that the reporting requirements for community-based financial institutions not be overly burdensome to ensure they are not excluded from new opportunities. 

Click here to read World Council's comment letter.  

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Comment Letter, Basel

FSB Sets Out 2024 Work Programme

The Financial Stability Board (FSB) published its work programme for 2024. Priority areas of work and new initiatives, including deliverables to the Brazilian G20 Presidency, include:

  • Supporting global cooperation on financial stability.The FSB continues to promote financial stability in a rapidly changing environment, in which vulnerabilities in the global financial system continue to be elevated, reflecting high interest rates and an uncertain growth outlook, while vulnerabilities from structural change continue to emerge in areas such as climate change, cyber, and crypto-asset markets.
  • Completing resolution reforms. The FSB will continue its work to promote the full implementation of the Key Attributes of Effective Resolution Regimes for Financial Institutions across all sectors. The focus will be to address the lessons learned from the March 2023 banking turmoil, including work on deposit behaviour and the role of technology and social media; and on interest rate and liquidity risk in the financial system. In 2024, the FSB will also finalise its proposals for a set of resources and tools to support the resolution of a central counterparty(CCP) and publish the list of insurers subject to the resolution planning standards.
  • Enhancing the resilience of NBFI.The FSB will continue to advance its work programme for enhancing NBFI resilience, which it is carrying out together with the standard-setting bodies and international organisations. This includes exploring policy recommendations or policy options for non-bank financial leverage; enhancing liquidity preparedness of non-bank market participants for margin and collateral calls; and conducting new work on the functioning and resilience of repo markets.
  • Enhancing cross-border payments.The G20 roadmap for enhancing cross-border payments co-ordinated by the FSB, contains a comprehensive set of actions  and a framework for monitoring progress toward achieving the quantitative targets that have been set for end-2027. As part of this, in 2024, the FSB will issue recommendations to promote alignment and interoperability in data frameworks related to cross-border payments and develop recommendations to strengthen the consistency of regulation and supervision of banks and non-banks providing cross-border payment services.
  • Harnessing the benefits of digital innovation while containing its risks. A key focus for 2024 and beyond is on ensuring the effective implementation of the agreed global regulatory and supervisory framework for crypto-asset activities and markets and for global stablecoin arrangements. The FSB will also complete work on the financial stability implications of tokenisation; prepare a report for the G20 on recent developments in AI and their potential implications for financial stability; and, in its efforts to enhance cyber resilience, design a format for incident reporting exchange(FIRE) to promote greater convergence in financial institutions’ reporting of incidents to financial authorities.
  • Addressing financial risks from climate change.The FSB will continue to coordinate international work through its roadmap for addressing climate-related financial risks. Work this year will include analysis of the relevance of transition plans for financial stability and, for the G20, a stocktake of regulatory and supervisory initiatives related to the identification and assessment of nature-related financial risks. The FSB will also prepare a further progress report on achieving consistent climate-related financial disclosures.

A copy of the programme can be viewed here.

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Financial Stability Board

World Council Touts Advocacy Successes, Focuses on 2024

The World Council of Credit Unions took stock of the many issues that arose during 2023 and the role of International Advocacy in shaping regulations to grow and strengthen credit unions.  Notably, World Council notes advocacy victories in the following areas:

  1. The G20 including proportionality in the Leaders’ Declaration on Sustainability Standards;
  2. Presenting at the United Nations on the role of credit unions and cooperatives in advancing financial inclusion;
  3. The inclusion of WOCCU advocated proportionality measures in the ISSB’s inaugural climate risk and sustainability disclosures;
  4. The inclusion of the support of financial inclusion in the G20 Leaders’ Declaration (and the corollary role that credit unions can play in advancing financial inclusion); and
  5. Various victories with the European Union on Basel III, payments, operational resilience, and others.

These advocacy victories directly result in the ability of the credit union cooperative model to be supported by appropriately tailored regulatory frameworks that enable credit unions to thrive.

World Council continues to be the only organization representing credit unions at the international standard setting level.  The involvement in these issues is informing World Council’s outlook on various issues that will receive attention in 2024 including, climate change, payments, cybersecurity, cryptocurrencies and others. 

World Council’s 2024 Outlook and 2023 Year-end Summary can be viewed here.

New European Authority for Anti-Money Laundering Proposed

The Council and Parliament reached a provisional agreement on creating a new European authority for countering money laundering and terrorist financing (AMLA). The goal is to protect EU citizens and the EU’s financial system by boosting the efficiency of the current AML/CFT framework through an integrated mechanism with national supervisors to ensure certain entities comply with the AML/CFT obligations.

AMLA will have supervisory powers over high-risk obliged entities in the financial sector. It will also have a supporting role in non-financial sectors and coordinate with financial intelligence units in member states. The future location of the new agency’s seat is yet to be determined. AMLA will have the authority to supervise up to 40 groups and entities in its first selection of credit and financial institutions that represent a high risk in several member states. The selected obliged entities will be supervised by joint teams led by AMLA that will carry out assessments and inspections.

Additionally, the provisional agreement expands the scope of AMLA’s supervisory database by requesting the Authority establish and maintain a central database of information relevant for the AML/CFT supervisory system. AMLA will have a general board composed of representatives of supervisors and Financial Intelligence Units from all members states as well as an executive board.

Next, the provisional agreement will be presented to member states’ representatives and the European Parliament for approval.

Click here to read the full press release

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European Commission

World Council Submits Comment Letter regarding FATF’s Guidance on Recommendation 25

World Council recently submitted a letter to the Financial Action Task Force (FATF) with comments regarding its Risk-Based Guidance on Beneficial Ownership (Recommendation 25). Recommendation 25 is additional guidance to help prevent the misuse of legal arrangements for money laundering or terrorist financing.

World Council expressed its support for strong anti-money laundering practices and the additional guidance to aid national-level implementation related to beneficial owners of certain accounts. However, World Council urged FATF to include stronger language ensuring individual countries create and maintain reliable registries for credit unions and other financial institutions to readily identify beneficial owners. World Council provided additional information regarding credit unions and the nature of their services. World Council's letter also requests clearer guidance to more specifically direct individual jurisdictions to take a proportional risk-based approach to establishing implementation requirements, specifically for credit unions.

Click here to read the full letter submitted by World Council.

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FATF

WOCCU Applauds Proportionality in FSB’s Toolkit on Vendor Management

WOCCU advocated proportionality was included in the Financial Stability Board’s (FSB) Toolkit for Enhancing Third-party Risk Management and Oversight.  The proportionality language makes it clear that many of the tools are unsuitable for smaller financial institutions and calls for the tailoring of the rules. 

This comes on the release by the FSB of the toolkit for financial authorities and financial institutions for their third-party risk management and oversight. The toolkit was developed in response to concerns over the extent and nature of financial institutions’ interactions with a broad and diverse ecosystem of third-party service providers, which could have implications for financial stability. Namely:

  •  The toolkit was developed in response to concerns over the risks to financial institutions from outsourcing and third-party service relationships.
  • The toolkit aims to strengthen financial institutions’ ability to manage third-party risks and financial authorities’ ability to monitor and strengthen the resilience of the financial system.
  • The toolkit aims to reduce fragmentation in regulatory and supervisory approaches across jurisdictions and financial services sectors and to facilitate coordination among financial authorities, financial institutions, and third-party services providers.

WOCCU participated in various consultations by the FSB including commenting on the consultation paper back in 2022. 

A copy of the toolkit can be viewed here.

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Financial Stability Board

Basel Committee Consults on Disclosures for Climate-related Financial Risk

The Basel Committee on Banking Supervision issued a public consultation paper on a Pillar 3 disclosure framework for climate-related financial risks.

The Committee is analyzing how a Pillar 3 disclosure framework for climate-related financial risks would further its mandate to strengthen the regulation, supervision and practices of banks worldwide with the purpose of enhancing financial stability, and the potential design of such a framework. It is publishing this consultation paper to seek the views of stakeholders on its preliminary proposal for qualitative and quantitative Pillar 3 disclosure requirements that would complement the work of other standard setters, including the International Sustainability Standards Board (ISSB), and provide a common disclosure baseline for internationally active banks.

The Committee goal is to ensure the availability of accurate, consistent and useful climate-related data that can be used to facilitate forward-looking risk assessment by banks is available.  The Committee is taking a flexible approach on the future framework given the evolving nature of this data.  

The Committee is considering which elements would be mandatory and which subject to national discretion. More generally, the Committee notes that the development of a meaningful and robust Pillar 3 framework for climate-related financial risks is likely to be an iterative process.

A copy of the consultation can be viewed here.

 

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Basel

Basel Committee Provides Details on Climate-Related Financial Risk Management

In a recent newsletter the Basel Committee provided additional information regarding the status of implementation of the Principles for the effective management and supervision of climate-related financial risks (Principles) and current gaps.

The Committee’s Principles are seeking to improve the banks’ climate-related financial risk management and lower risks to the global banking system.

After reviewing the status of implementation and meeting with supervisors and stakeholders, the Committee identified key areas of focus for the future. Enhancing data availability and quality is a top priority as data limitations were identified as the main impediment for banks and supervisors to implement the Principles. The Committee believes financial institutions will need to invest in better tools and greater automation to capture climate data and minimize operational risks.

Building capabilities and expertise was also identified as a significant challenge and area of focus. The lack of professional experience and human capital continues to challenge the speed of implementation. The Committee is recommending financial institutions continue to build in-house expertise to support integrating and mitigating climate-related risks into their management practices.

Finally, applying climate scenario analysis will be a focus moving forward. Financial institutions reported running a range of different scenarios for different purposes, such as for strategic planning and risk management frameworks. However, the uses and methodologies vary across jurisdictions.

The Committee will continue to monitor implementation progress but it is clear that financial institutions will need to devote further resources to fully implement the Principles.

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Basel

FSB Report on Multifunction Crypto-Asset Intermediaries

The Financial Stability Board (FSB) recently published a report on the financial stability implications of multifunction crypto-asset intermediaries (MCIs). MCIs are individual firms or groups of affiliated firms that provide crypto-asset services, products and functions usually around a trading platform. In many cases MCI vulnerabilities are similar to those of traditional finance. However, these vulnerabilities can be amplified by limited controls and operational transparency. MCI vulnerabilities could impact traditional financial systems through transmission channels.

FSB will be monitoring the development of MCIs and the crypto-asset sector as a whole to determine the financial stability implications on the broader economy. Comprehensive and consistent regulations to the crypto-asset market will be critical to minimizing the vulnerabilities and impact on the overall financial stability of the market.

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Financial Stability Board

Regulator Diversity and Inclusion Round-Up

Financial service regulators globally continue to look at the impact of diversity and inclusion within their own organization and credit unions. Regulators recognize the impact diversity and inclusion has on safety and soundness. Earlier this year, the Financial Conduct Authority (FCA) in the United Kingdom set out proposals to increase diversity and inclusion, reduce groupthink and maximize talent. The proposals noted that increase in diversity and inclusion in regulated financial services firms can produce better internal governance, decision making and risk management practices. The new rules and guidance identify that bullying and sexual harassment amongst other forms of misconduct pose a risk to a healthy firm culture.

The Central Bank of Ireland (CBI) has conducted regular reviews of large regulated financial service providers and their diversity and inclusion progress. CBI also noted the tie between diversity and inclusion and the safety and soundness of the financial service organizations. CBI continues to conduct thematic assessments of insurance and banking firms, specifically in terms of gender representation.

This month the National Credit Union Association (NCUA) wrapped up its annual Diversity, Equity and Inclusion summit with a special focus on the internal practices of credit unions in the United States and best practices related to diversity and inclusion.  NCUA also conducts an annual voluntary diversity and inclusion survey to assess the state of the industry.

Increasingly regulators are connecting the impact diversity and inclusion has in strong governance and risk management practices. Both the safety and soundness and financial inclusion mission of credit unions are impacted by its internal and external progress towards diversity and inclusion.

US Congressmen Question Basel Committee Rulemaking Process

A few members of the United States Congress are requesting the U.S. Government Accountability Office (GAO) examine the role U.S. federal banking agencies played in the Basel III international capital standards. Financial Services Committee Chairman Patrick McHenry and Monetary Policy Subcommittee Chairman Andy Barr are criticizing the global regulatory capital requirements and related U.S. implementation proposals.

The committee chairmen are questioning the transparency of the Basel Committee on Banking Supervision (BCBS), how the international standards were developed, and the use of those standards in the creation of the U.S. proposed capital rules. Their request for a GAO review comes after the U.S. Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC), jointly proposed new rules which would require significant changes to the US regulatory capital regime for the largest US banks by July 2025.

As national level governments continue to review and implement Basel III standards, World Council in collaboration with its members, continue to encourage proportional and properly tailored standards for credit unions. Click here to read the joint letter from World Council and Credit Union National Association (CUNA) urging proportionality in the U.S. approach to Basel III for credit unions.

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Basel

Basel Committee Discusses Banking Vulnerabilities, Climate and Cryptoasset Disclosures

The Basel Committee on Banking Supervision met in October to evaluate recent market developments and risks to the global banking system. The Committee also discussed several policy and supervisory initiatives.

The Committee reviewed the outlook for the global banking system given the March 2023 banking turmoil and high interest rate environment. The banking challenges that occurred this Spring were the most significant system-wide stress on the banking industry since the Great Financial Crisis. The Committee reflected on the causes of the banking turmoil and the regulatory and supervisory lessons learned in its October 2023 report. Based on this report, which the Group of Governors and Heads of Supervision recently reaffirmed, the Committee will be pursuing several initiatives. These include:

  • Prioritising work to strengthen the supervisory effectiveness and areas that need additional global guidance; and
  • Pursuing additional follow-up analytical work to assess whether specific standards of the Basel Framework produced the intended result during the March 2023 banking turmoil (especially related to liquidity and interest rate risk).

In addition to reflecting on this year’s banking challenges and future adjustments, the Committee discussed both climate risks and cryptoasset exposure. The Committee agreed to consult on a Pillar 3 disclosure framework for bank exposures to climate-related financial risks. The Committee will be publishing a consultation paper on this topic by November. The Committee also agreed to consult on disclosure requirements regarding banks’ cryptoasset exposures. These new disclosures would complement the previous standards issued by the Committee in December 2022. The consultation paper on cryptoassets is expected soon.

Finally, members of the Committee also discussed how advances in digitalisation and financial technology are impacting the financial system. Trends discussed included the provision of banking services through non-bank intermediaries (“Banking as a Service”). The Committee expects to publish a report in 2024 on developments in digitalisation of finance and their implications for banks and supervisors.

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Basel

Climate-Related Disclosure and Monitoring Grows

The Financial Stability Board (FSB) has published its annual progress report on climate-related disclosures. The report indicates further development regarding climate disclosures over the last year. International regulatory bodies are focused on creating comparable public disclosures of climate-related financial risks to use in the analysis of vulnerabilities in the financial system.

In the report, the FSB welcomed the International Sustainability Board (ISSB) disclosure standards and plans to work with other relevant bodies to promote them. The ISSB standards will serve as a framework for different companies across the globe to provide climate related disclosures consistently. Implementation and the applicability of ISSB standards with individual jurisdictional disclosure frameworks is valuable to regulatory bodies to compare climate-related disclosures from companies in different countries.

Additionally, the International Auditing and Assurance Standards Board (IAASB) and International Ethics Standards Board for Accountants (IESBA) are making significant progress in their efforts to produce a global set of assurance, ethics, and independence standards. This set of standards is intended to improve the quality and reliability of sustainability-related information through third-party assurance. Compliance and enforcement of these standards could deter “greenwashing”.

Also of note, the Task Force on Climate-related Financial Disclosures (TCFD) released its final status report and will be disbanded now that it has completed its final initiative. TCFD was created by the FSB and made up of industry representatives. It created a set of voluntary disclosure recommendations for use by companies to provide information to investors, lenders, and insurance underwriters about their climate-related financial risks.

The report indicates that progress continues as all FSB jurisdictions either have requirements, guidance, or proposals pending related to climate disclosures.

World Council continues to advocate for proportionality where appropriate and monitor developing disclosure requirements closely. Click here to access the FSB press release and related reports.

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Financial Stability Board

European Commission Proposes Head Office Tax System for SME’s

The European Commission has proposed giving small and medium enterprises (SMEs) the ability to interact with a single Head Office tax authority. The Commission is making this proposal to alleviate the complexity and compliance costs of cross border operations when operating with a permanent establishment in more than one member state. SMEs would have the opportunity to calculate their tax liability based only on the tax rules of the Member State allowing them to file one tax return. 

The proposal contains detailed provisions to streamline the tax process and allow small businesses to grow and develop. If an SME meets the proposed criteria businesses will have the choice to file under a single Head Office and will remain under that same Head Office system for five years. 

Further details of the streamlined tax option as part of a larger SME Relief Package can be found in the full text of the proposal.

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European Commission

World Council Urges Basel Committee to Limit Regulatory Burden on Credit Unions

World Council submitted a comment letter last week on the Basel Committee’s proposed updates to the Core Principles for Effective Banking Supervision (Core Principles). The Core Principles are global standards for prudential regulation and supervision. Supervisory authorities across the globe use the Core Principles as a benchmark for evaluating the effectiveness of their regulatory and supervisory frameworks. This is the first formal update to the Core Principles since 2012.

In the comment letter, World Council strongly urged the Basel Committee to include more direct language concerning proportionality and communication with national level supervisory authorities. We also highlighted the ongoing challenges of accessing quality correspondent banking services and the disproportionate burden recent guidance on operational resilience, climate, digitization and stress testing will have on credit unions.

World Council has long advocated for clearer language regarding proportional implementation of international standards. It is critical that laws and regulations designed to address the largest international banks posing the greatest risks to the financial markets are appropriately tailored for credit unions serving their local community. While the World Council requested several additions and adjustments to the Core Principles, we are pleased that the Basel Committee’s proposed revisions include several updates favorable to credit unions recognizing proportionality.  

A copy of the letter can be viewed here.  

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Comment Letter, Basel

Basel Committee Oversight Body Focuses on Learnings from Banking Turmoil

The Group of Central Bank Governors and Heads of Supervision (GHOS), which oversees the Basel Committee on Banking Supervision, met in September to discuss lessons learned from recent banking challenges and review the implementation status of outstanding Basel III standards.

The Spring’s individual bank failures and turmoil resulted in Basel Committee initiatives such as strengthening supervisory effectiveness, pursuing additional analytical work, and assessing the need to explore policy options. GHOS endorsed Basel Committee’s response to the events this Spring.  

The GHOS will be publishing the Basel Committee’s regulatory and supervisory lessons learned from the recent stress in the financial services industry. They include:

  • The banks’ risk management practice and governance arrangements are the most important foundation to operational resilience.
  • Strong supervision plays a vital role in overseeing the safety and soundness of banks. Effective supervision must act early to identify weaknesses in bank practices.
  • The importance of a prudent regulatory framework in safeguarding financial stability.

The GHOS is supporting a series of follow up initiatives. They include strengthening supervisory effectiveness and identifying issues that could merit additional guidance at a global level and follow-up analytical work to determine if components of the Basel Framework are performing as intended.

The GHOS noted that members continue to make progress in implementing the Basel III reforms, which were finalized 2017.  All remaining jurisdictions and standards of Basel III are expected to be implemented by the end of 2025.

Additional information can be found here.

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Basel

FSB identifies frictions from data frameworks that pose challenges to enhancing cross-border payments

The Financial Stability Board (FSB) published its stocktake of international data standards relevant to cross-border payments. The stocktake looks at national and regional data frameworks relevant to the functioning, regulation and supervision of cross-border payment arrangements. It takes forward one of the priority actions under the G20 Cross-border Payments Roadmap, to enhance the interaction between data frameworks and cross-border payments. The report:

  • Identifies frictions that pose challenges to improving the cost, speed, transparency and access of cross-border payments;
  • Highlights fragmentation in data frameworks as a main contributor to increased cost and inability to automate cross-border payments;
  • Notes that by early 2024, the FSB will develop recommendations, for public consultation, for promoting alignment and interoperability across data frameworks applicable to cross-border payments.

The stocktake was conducted to identify issues relating to cross-border use of data by national authorities and by the private sector in cross-border payment arrangements. The report identifies a number of frictions from data frameworks that pose significant challenges to improving the cost, speed, transparency and access of cross-border payments. These include uncertainty among payment providers on how to balance the various obligations under different data frameworks, such as obligations related to data privacy and to anti-money laundering and combating the financing of terrorism (AML/CFT); and challenges arising from restrictions on the flow of data across borders, which could make it more difficult to identify fraud, comply with AML/CFT and other regulatory obligations, as well as manage risk on an enterprise-wide basis. A certain degree of friction from data frameworks may be an unavoidable and acceptable consequence of regulations aimed at preserving the security of transactions, meeting AML/CFT objectives and protecting the privacy of citizens. However, the extent of fragmentation in data frameworks across jurisdictions was considered a main contributor to increased cost and inability to automate payments.

Work is already underway in the FSB to follow-up on this stocktake and address these issues. In particular, the FSB is developing recommendations to promote alignment and interoperability across data frameworks applicable to cross-border payments. To inform its work, the FSB will engage with industry, data privacy experts, financial regulators and data protection agencies to develop case studies to assess the impact of selected frictions on cross-border payments and identify where action should be prioritised.

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Financial Stability Board

FSB Chair writes to G20 Leaders ahead of the New Delhi Summit

The Financial Stability Board (FSB) today published two letters from its Chair, Klaas Knot, to G20 Leaders ahead of their Summit in New Delhi on 9-10 September, noting the following key points:

  • FSB Chair warns that the higher interest rates that have been necessary to address inflation, alongside a slowing growth outlook, could impair the capacity of borrowers to service historically high levels of debt.
  • Work to address financial stability risks associated with leverage in the non-bank financial intermediation (NBFI) sector will be a major focus of FSB policy work in 2024.
  • A separate letter calls for continued support from Leaders as work to enhance cross-border payments shifts towards implementing practical projects in partnership with the private sector.

The first letter outlines the work the FSB has undertaken under the Leadership of India’s G20 Presidency to address existing vulnerabilities in the financial system and enhance the resilience of the financial system to structural change.

The letter notes the challenging backdrop of strong and persistent inflation and slowing growth, and warns that rising interest rates could impair the capacity of borrowers to service the historically high stock of global debt. He calls on authorities to closely monitor asset quality in those sectors most sensitive to higher interest rates, such as real estate. The letter highlights concerns over the build-up of leverage in the NBFI sector, described in a report being delivered to the Summit, and notes that addressing these risks will be a major focus of NBFI policy work next year.

The March banking-sector turmoil constituted a test of the financial reforms put in place following the 2008 crisis. It exposed vulnerabilities in individual institutions relating to poor liquidity and interest rate risk management and governance, and reinforced the need for strong and effective supervision and The FSB and the Basel Committee on Banking Supervision (BCBS) are examining the implications of these issues to identify lessons and adjust policy frameworks where needed. The FSB remains convinced that the international resolution framework developed by the FSB in the aftermath of the 2008 Global Financial Crisis is fit for purpose, but we have identified a number of implementation challenges that need to be addressed. To this end, the FSB will soon publish a report on preliminary lessons learned for resolution and policy priorities going forward.

The letter outlines the FSB’s work to address the financial stability implications of two secular trends – digitalisation and climate change. In response to the former, the FSB delivered to the G20 in July a set of recommendations for the regulation, supervision and oversight both of crypto-assets and markets and of global stablecoin arrangements. The FSB is now working with standard-setting bodies and international organisations to ensure that these recommendations are implemented globally. Recognising that crypto-assets raise both financial stability and macroeconomic risks, the FSB and IMF are delivering to the Summit a Synthesis Paper that brings together the risks identified by each institution and how they interact. The paper also includes a roadmap for future work.

 

Accelerating digitalisation across the financial system has improved efficiencies but also raised operational resilience challenges. For instance, the interconnectedness of the global financial system makes it possible that an incident at one financial institution, or at one of its third-party service providers, could have spill-over effects across borders and sectors. To address these risks the FSB issued in April recommendations to achieve greater convergence in cyber incident reporting frameworks. The FSB has also consulted on a policy toolkit that financial institutions and financial authorities can use to enhance their third-party risk management and oversight. The toolkit will be finalised in December.

In response to climate risks, the FSB is coordinating closely with standard-setting bodies and international organisations to implement the four building blocks of its Roadmap on Climate-related Financial Risks. An important milestone has been the publication of the International Sustainability Standards Board (ISSB)’s disclosure standards, which have been endorsed by the International Organization of Securities Commissions (IOSCO). The ISSB standards will strengthen the comparability, consistency and decision-usefulness of climate-related financial disclosures around the world. These standards can be seen as a culmination of the work of the FSB’s Task Force on Climate-related Financial Disclosures (TCFD), which has made a major global contribution since its creation in 2015.

A second letter provides to G20 Leaders an update on the G20 Cross-border Payments Roadmap. The first phase – the initial set of actions set out in the 2020 Roadmap – has now largely been completed. This year, in the second phase, the authorities and standard setters have focused their efforts on concrete projects that will make a difference across various parts of the cross-border landscape and on developing further the partnership with the private sector to work to achieve the Roadmap goals. The letter underscores the need for continued further political support and sustained effort by the public and private sectors in order to meet the G20 targets by 2027 to make cross-border payments cheaper, faster, more inclusive and more transparent. Leadership from the G20 has energised the public and private sectors and provided the political impetus, without which change will not happen.

A copy of the press release can be viewed here.

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Financial Stability Board

Basel Committee Issues Newsletter on Credit Risk Issues

The recent Newsletter issued by the Basel Committee on Banking Supervision highlights the following points:

  • Ongoing economic uncertainty continues to pose challenges for banks when assessing the credit quality of borrowers and vulnerable sectors.
  • Sound provisioning practices enable banks identify any deterioration in credit risk in a consistent and timely way, thus forming an integral part of credit risk management.
  • Supervisors continue to observe a range of practices on internal ratings-based (IRB) models and provisioning across banks and have taken supervisory action, including thematic deep dives, onsite investigations, issuing guidance and bank-specific actions.
  • The Committee intends to continue monitoring bank practices in assessing credit risk and setting provisions, as the global economy continues to evolve.

Since the Newsletter on Covid-19 related credit risk issues was published in March 2022, credit risk continues to be a key area of focus for the Committee, amid the ongoing macroeconomic uncertainty and the potential impact on borrowers from rising interest rates, high inflation and market volatility. Failure to identify and measure deterioration in credit risk in a timely and consistent way may lead to higher future bank losses and capital inadequacy that could undermine confidence in the banking sector. Against this backdrop, supervisors remain cautious on banks' practices, given the challenges banks face in capturing any potential deterioration in the credit quality of borrowers and counterparties, considering model and data limitations.

Supervisors consider it crucial that banks adopt a high-quality and robust approach to credit risk modelling that can be applied consistently over time. The Covid-19 pandemic has increased the challenges banks face when assessing the credit quality of borrowers. The Committee has been monitoring and sharing supervisory observations on banks' policies and practices in relation to credit risk modelling, focusing on issues exposed by the Covid-19 pandemic that may remain relevant in the current risk environment. The work highlighted:

  • The credit quality assessment of borrowers has become increasingly challenging for banks in the light of the Covid-19 pandemic. A range of practices have been observed in expected credit losses (ECL) provisioning and credit risk internal ratings-based (IRB) models, and there remains scope for further developing robust practices across banks.
  • Supervisors continue to observe three main challenges that warrant further monitoring, namely (i) governance controls around model risk management including judgment-based overlay and model performance; (ii) capturing economic uncertainty; and (iii) identifying credit deterioration in vulnerable sectors and borrowers. Together these challenges could affect banks' ability to recognise changes in credit risk in a timely manner.
  • Banks continue to apply sizeable judgment-based adjustments to compensate for model and data limitations to reflect credit risk expectations. Due to the scale of government support measures, some of credit risk have become disconnected from the actual risks of the portfolios, which may still materialise in the future.
  • The Committee recognises the role played by judgment-based adjustments related to model performance and emphasises that these adjustments should be subject to robust governance and supported by appropriate documentation and methodologies. Banks should monitor and continuously enhance controls around model risk management and development to ensure they remain fit for purpose.
  • Banks and supervisors may not have an accurate view of credit risk if model issues are not well understood or adequately compensated for. Supervisors continue to focus on banks' ability to identify model performance issues in a timely manner, and to identify enhancements to ensure a well controlled modelling process. Supervisors also continue to focus on banks' strategic plans to minimise and/or mitigate model risk through better capture of key risk drivers and robust data governance that are relevant to support a sound expected credit loss (ECL) process.
  • Undercalibration of probability-of-default (PD) models has been observed by supervisors, and supervisory measures have led to remedial action on the part of banks, including model overlays, risk-weighted assets (RWA) overlays, PD scale-ups and RWA add-ons.
  • Recent geopolitical events may have started a new cycle of credit conditions before possible effects of the Covid-19 pandemic have fully fed through. Focus has shifted towards adjustments to capture the impact on borrowers of factors from rising interest rates, high inflation, and market volatility. It may be more challenging to isolate the downturn period that should be used for the ECL process and for IRB models.
  • Banks have experienced difficulties in assessing how economic shocks affect different portfolios as the risk environment has evolved rapidly and is very different from that of the recent past, leading to heightened model risk. Supervisors have observed that banks apply a range of different approaches to capture the impact of macroeconomic headwinds on borrowers, particularly when historical data may not reflect the current economic outlook. Supervisors continue to focus on: (i) how banks are using their sensitivity analysis capabilities to understand the impact of using alternative economic assumptions on provision estimates; and (ii) how effective banks' processes are in identifying vulnerable sectors and factoring sectoral risks in to provision estimates.
  • The Committee stresses the importance of: (i) sensitivity analysis in assessing credit risk; and (ii) the appropriate use of data collected during the pandemic to understand how the key drivers of credit losses affect different portfolios.
  • Supervisors and banks need to be prepared to address the challenges related to ECL provisioning processes and IRB models to ensure banks are able to identify any potential deterioration in the credit quality of borrowers and counterparties.

The Committee intends to continue assessing bank practices in credit risk modelling and will continue to monitor potential risks in the evolving economic environment and financial conditions.

A copy of the Newsletter can be viewed here.

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Basel

Basel Committee Consults on Core Principles

The Basel Committee on Banking Supervision has issued a public consultation on revisions to the Core principles for effective banking supervision ("Core Principles").

The Core Principles are the de facto minimum standards for the sound prudential regulation and supervision of banks and banking systems. They are universally applicable and accommodate a range of banking systems and a broad spectrum of banks. The Core Principles are used by supervisors to assess the effectiveness of their regulatory and supervisory frameworks. They are also used by the International Monetary Fund (IMF) and World Bank as part of the Financial Sector Assessment Program (FSAP) to evaluate the effectiveness of countries' banking supervisory systems and practices.

Originally issued by the Committee in 1997, the Core Principles were last substantively updated in 2012. The Committee commenced a review of the Core Principles in April 2022, with the objective of reflecting supervisory and regulatory developments, structural changes affecting the banking system, and lessons learnt from FSAPs since the last update.

Changes are proposed to both the structure and contents of the Core Principles standard. The proposed amendments have been informed by several thematic topics reflecting regulatory and supervisory developments in: (i) financial risks; (ii) operational resilience; (iii) systemic risk and macroprudential aspects of supervision; (iv) new risks, including climate-related financial risks and the digitalisation of finance; (v) non-bank financial intermediation; and (vi) risk management practices.

The proposals were developed by a Task Force comprised of both Committee and non-Committee member jurisdictions, as well as the IMF and World Bank.

A copy of the consultation can be viewed here.

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Basel

FATF Issues Targeted Update on Implementation of FATF Standards on Virtual Assets

The Financial Action Task Force has issued its Targeted Update on the Implementation of FATF Standards on Virtual assets calling for all countries to rapidly implement measures on virtual assets (VA) and virtual asset service providers (VASPs).

In 2019, FATF extended its anti-money laundering and counter-terrorist financing (AML/CFT) measures to VA and VASPs to prevent criminal and terrorist misuse of the sector. Since then, FATF has produced three reviews on implementation of its standards on VAs and VASPs. This report provides an update on country compliance with FATF’s Recommendation 15 and its Interpretative Note (R.15/INR.15), including the Travel Rule, and updates on emerging risks and market developments, including on Decentralized Finance (DeFi), Peer-to-Peer transactions (P2P), and Non-Fungible Tokens (NFTs), unhosted wallets, and stablecoins.

FATF's report finds that jurisdictions continue to struggle with fundamental requirements such as undertaking a risk assessment, enacting legislation to regulate VASPs, and conducting a supervisory inspection. Based on 98 FATF mutual evaluation and follow-up reports since the revised R.15/INR.15 was adopted, 75% of jurisdictions are only partially or not compliant with the FATF’s requirements. In addition, jurisdictions have made insufficient progress on implementing the Travel Rule, which is a key AML/CFT measure. Of the 151 jurisdictions that responded to FATF’s 2023 Survey, more than half still have not taken any steps towards implementing the Travel Rule. This is a serious concern as the risks posed by VAs and VASPs continue to increase and that the lack of regulation creates significant loopholes for criminals to exploit. This demonstrates an urgent need for jurisdictions to accelerate implementation and enforcement of R.15/INR.15 to mitigate criminal and terrorist misuse of VA and VASPs.

FATF’s report acknowledges collaboration among the private sector members to improve industry compliance with R.15/INR.15 including the Travel Rule and highlights that all players need to have appropriate risk identification and mitigation measures and continue to work towards fully compliant Travel Rule compliance tools.

While DeFi and unhosted wallets including P2P do not account for a large share of transactions, they are at risk of misuse, including by sanctioned actors. The FATF will therefore continue to monitor the illicit financing risks and developments in this sector.

The FATF calls on all countries to rapidly implement the FATF’s Standards on VAs and VASPs, including the FATF’s Travel Rule. In February 2023, the FATF adopted a roadmap to improve implementation of R.15. In line with this roadmap and to address the findings of this report, the FATF will:

  •  Continue to conduct outreach and provide assistance to low-capacity jurisdictions
  • Identify and publish steps FATF member jurisdictions and other jurisdictions with materially important VASP activities have taken towards implementing R.15/INR.15
  • Facilitate sharing of finding, experiences, and challenges including relating to DeFi, unhosted wallets, and P2P and monitor market trends in this area for material developments that may necessitate further FATF work
  • Continue to engage with member countries and the private sector on progress and challenges
  • Conduct a further review on progress and remaining challenges for implementation by June 2024

 A copy of the report can be viewed here.

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FATF

FSB Publishes Annual Progress Report on Roadmap Addressing Climate-Related Financial Risks

On July 13, 2023, in response to the finalization of the International Sustainability Standards Board's (ISSB) global sustainability disclosure standards, the Financial Stability Board released its annual progress report on the FSB Roadmap for Addressing Climate-Related Financial Risks, which outlines advancements achieved in support of the roadmap that were made not only by the FSB, but also standard-setting bodies and other international organizations. The progress report further highlights areas that need additional consideration, as well as updates on Roadmap action items. On July 17-18 in a meeting in Gandhinagar, India, the progress report will be delivered to the G20 Finance Ministers and Central Bank Governors for review.

The FSB has made it clear it is in support of the ISSB's final standards. Finalization has prompted a handover in the responsibility to monitor progress made with firm disclosures. Monitoring responsibilities will shift from the Task Force on Climate-Related Financial Disclosures (TCFD), which was created by the FSB to develop recommendations on effective disclosures, to the ISSB in 2024. According to the FSB, there is progress in all four blocks of the Roadmap, including firm-level disclosures, data, vulnerabilities analysis, and regulatory and supervisory practices and tools.

More information on the FSB’s work on addressing climate-related financial risks is available here.

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Financial Stability Board

IFRS Updates Educational Materials on Climate-Related Matters

On June 26, 2023, the inaugural IFRS Sustainability Disclosure Standards were released. Specifically, the International Sustainability Standards Board (ISSB) issued IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures; and in response, the IFRS has updated its Educational Material: Effects of Climate-Related Matters on Financial Statements. The educational material helps companies comprehend how to report on “material” climate-related matters in their financial statements. While the IFRS Accounting standards (developed by the IASB), do not clearly refer to climate-related matters, consideration of material climate-related matters is required by the IASB’s standards. The IASB is also working on a project on Climate-Related Risks in Financial Statements, to improve upon a financial statements’ ability to convey climate-related risks. The IASB is also considering whether to include “sustainability-related risks and opportunities beyond those related to climate.”

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Financial Stability Board