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Artificial Intelligence Highlighted in New Report by BIS

The Bank for International Settlements (BIS) released a special chapter on Artificial Intelligence (AI) in its new Annual Economic Report of 2024. The increased use of AI has significant implications for the financial system and its stability. The report highlights the impact of AI on Central Banks and the need to anticipate AI’s impact across the economy. Looking forward, Central Banks will need to determine how best to utilize AI in their own operations, especially in the area of data and data governance. The quick rise in adoption of AI within the financial sector and larger economy implies there is an urgent need for Central Banks to quickly increase their understanding both as informed observers of technology advancements as well as users of the technology itself.

The report provides an overview of developments in AI and the underlying technology. It also examines the implications of AI on the financial sector as well as emerging opportunities and challenges for Central Banks.

Click here to read the special chapter on AI.

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Bank of International Settlements

European Council Reaches an Agreement on GDPR Cross-Border Enforcement

The European Council (Council) reached an agreement on a common member states’ position on a new law intended to improve cooperation between national data protection authorities. The General Data Protection Regulation (GDPR) harmonizes data protection rights across Europe and applies to any organization that deals with personal data of EU citizens or residents, regardless of where they are based. To better facilitate GDPR enforcement this new law will require national data protection authorities to cooperate quickly when a data protection case concerns cross-border processing.

Once adopted, the regulation will provide tools for quickly handling the complaints filed by citizens or organizations. It also clarifies procedural deadlines and specific steps of an investigation, including the process for the adoption of a binding opinion by the European Data Protection Board (EDPB).

The Council will next begin negotiations with the European Parliament to agree on the final legislative text. Click here to learn more.

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Council of the European Union

Basel III Reforms: New EU Rules to Increase Resilience to Economic Shocks

The European Council (Council) adopted new rules aimed at making financial institutions operating in the EU more resilient to possible economic shocks. The changes are intended to strengthen their supervision and risk management as well as sustainability in the banking sector. The new rules update the capital requirements regulation and directive that translate the Basel III standards into EU legislation.

The reforms added an “output floor” feature that limits the risk of excessive reductions in financial institutions’ capital requirements. The reforms also set a transitional regime for crypto assets and amendments to enhance the management of Environmental, Social and Governance (ESG) risks.

This is the last step of the adoption procedure. The amended capital requirements regulation and capital requirements directive will be published in the EU’s Official Journal. Member states will have 18 months to implement the directive into national legislation. The regulation changes will apply beginning January 1, 2025. Click here for more information.

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Council of the European Union

Basel Committee Publishes Report on Implications of Digitalization of Finance on Banks and Supervision

On May 16, 2024 the Basel Committee published a report on the Digitalisation of Finance, outlining the risks and benefits of new technologies and its suppliers for the purposes of banking services, as well as “eight implications for banks and supervisors relating to macro-structural elements, specific digitalisation themes, and capacity building and coordination.” The report expands on the 2018 Sound Practices: implications of fintech developments for banks and bank supervisors. Technologies such as application programming interfaces, artificial intelligence and machine learning, distributed ledger technology and cloud computing, as well as new technologically enabled suppliers (eg big techs, fintechs and third-party service providers) and business models are reviewed within the report. The Committee hopes to address regulatory and supervisory implications such as:

  • “monitoring evolving risks and adopting a responsible approach to innovation;
  • safeguarding data and implementing robust risk management processes; and
  • securing the necessary resources, staff and capabilities to assess and mitigate risks from new technologies and business models.”

More information on the report on the digitalization of finance is available here.

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Basel

Over 20 Jurisdictions Use or Plan to Use the ISSB’s Standards

According to the IFRS, “Jurisdictions representing over half the global economy by gross domestic product (GDP) have announced steps to use the International Sustainability Standards Board’s (ISSB) Standards or to fully align their sustainability disclosure standards with those of the ISSB.” This includes over 20 jurisdictions representing close to 55% of the GDP, over 40% of global market capitalization, and more than half of global greenhouse emissions.

The IFRS believes the International Organization of Securities Commissions’ (IOSCO) endorsement of the ISSB’s sustainability-related financial disclosure standards back in July 2023, has created a “significant response” after encouraging its members to adopt, apply or be informed of the Standards so that it fosters consistency and comparability for companies’ climate and sustainability-related disclosures for investors. IOSCO has 130 member jurisdictions that regulate more than 95% of the world’s securities markets.

On May 28, 2024, the IFRS Foundation announced that is released a guide, the Inaugural Jurisdictional Guide for the adoption or other use of ISSB Standards, to help jurisdictions design and plan for the adoption or other use of its ISSB Standards. The Foundation has also outlined its Regulatory Implementation Programme, which is a framework to collaborate with the Growth and Emerging Markets Committee of IOSCO.

More information is available here.

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IFRS

European Council Approves Artificial Intelligence Act

On May 21, 2024, the European Council announced its approval of the Artificial Intelligence or AI Act, to set a global standard AI regulation through a risk-based approach. “The new law aims to foster the development and uptake of safe and trustworthy AI systems across the EU’s single market by both private and public actors.” The AI Act provides classification of AI systems based on risk, with lower risk systems being subject to light transparency obligations and high-risk systems subject to more requirements and obligations. AI that is capable of cognitive behavioural manipulation, social scoring, and the use of AI for predictive policing based on biometric data that categorize people based on race, religion, or sexual orientation will be banned in the EU. An AI Office in the European Commission, scientific panel, and an AI Board with member states’ representatives will be implemented as governing bodies to ensure enforcement.

More information on the AI Act is available here.

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Council of the European Union

FSB Consults on Liquidity Preparedness

The Financial Stability Board (FSB) published a consultation report on liquidity preparedness for margin and collateral calls. The report sets out eight proposed policy recommendations to enhance the liquidity preparedness of non-bank market participants for margin and collateral calls in centrally and non-centrally cleared derivatives and securities markets (including securities financing such as repo).

In particular the report:

  • Identifies weaknesses in risk management and governance as key causes of inadequate liquidity preparedness by some non-bank market participants during recent incidents of liquidity stress in financial markets.
  • Proposes eight policy recommendations focused on managing and mitigating the impact of spikes in margin and collateral calls in the non-bank financial intermediation (NBFI) sector.
  • Makes proposed recommendations cover liquidity risk management and governance, stress testing and scenario design, and collateral management practices of non-bank financial institutions.

The report highlights the need for policy adjustments to deal with liquidity strains in the NBFI sector arising from spikes in margin and collateral calls during times of market stress, such as the March 2020 market turmoil, Archegos, and the commodities markets turmoil and stress in liability-driven investment funds in 2022. To achieve this, the FSB is proposing eight high-level and cross-sectoral policy recommendations that build on and complement existing rules and regulations on liquidity risk management across different sectors and jurisdictions.

The recommendations cover liquidity risk management and governance, stress testing and scenario design, and collateral management practices of non-bank market participants, focussing on liquidity risks arising from spikes in margin and collateral calls. They apply to non-bank market participants that may face margin and collateral calls, including insurance companies, pension funds, hedge funds, other investment funds and family offices. They are proposed to apply proportionately with a focus on non-bank market participants with material exposures to spikes in margin and collateral calls during times of stress. The report also highlights the need for financial intermediaries in bilateral transactions with non-financial entities, such as commodities traders, to consider assessing their liquidity preparedness for spikes in margin calls and collateral during times of stress.

A copy of the consultation can be viewed here.

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Financial Stability Board

FSB Europe Group discusses Crypto and Real Estate Risks

The Financial Stability Board (FSB) Regional Consultative Group (RCG) for Europe met in London to discuss global an regional macroeconomic developments and their implications for financial stability.  In particular they discussed the macro-financial environment that continues to be shaped by the adjustment of the global economy to high interest rates, while geopolitical factors are weighing on the outlook.

The group noted that despite tight financing conditions and subdued confidence, growth in the region is projected to gradually pick up, amid a recovery in real incomes. In global financial markets, certain asset valuations remain stretched and vulnerable to adjustment in the face of adverse shocks. Members discussed sectors which warranted close monitoring, specifically the outlook for – and risks associated with – commercial real estate markets, which have been undergoing a substantial adjustment recently, due to both cyclical and structural shocks.

Members received an update on the FSB’s work priorities for 2024, including its deliverables under Brazil’s G20 Presidency. The effective implementation of its global regulatory and supervisory framework for crypto-asset activities and markets is a key focus for the FSB. Members shared their experiences in addressing regulatory challenges stemming from the cross-border and cross-sectoral nature of crypto-asset activities. They also exchanged views on preparations for new crypto-asset regulations entering into force, such as the Regulation on Markets in Crypto-assets (MiCA) in the European Union and the proposed regulatory regime for crypto-assets in the United Kingdom.

The Brazilian G20 Presidency has asked the FSB to take stock of new developments in artificial intelligence (AI) and their potential implications for financial stability. The day before the meeting, the RCG held a seminar with invited guests from academia and industry on AI and its role in the financial system. The discussion focused on developments in AI, use cases in the financial sector, and implications for financial stability.

A copy of the release can be viewed here.

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Financial Stability Board

World Council Urges G20 to Support Credit Unions on Financial Inclusion

The World Council of Credit Unions urged the G20 to adopt language in this year’s Leaders’ Declaration to embrace proportionality that can enable credit unions as community based financial institutions to address financial inclusion around the world.  This year’s Summit under Brazil’s Group of Twenty (G20) Presidency focuses on the theme “Building a Just World and a Sustainable Planet.”  This theme highlights the world’s commitment to fair agreements that promote global economic and social development and the reduction of inequality worldwide.

To that end, World Council notes that policies conducive to increasing financial literacy and consumer protection, reducing financial exclusion, bridging the digital divide among many groups, and reducing inequalities are key to an equitable future.  Specifically, the connection between proportionality an enabling non-profit, community based financial institutions can play a critical role in accomplishing these goals.

World Council notes that a barrier to the proportional tailoring of regulations often occurs at the national level.  Thus, the requested language in the Leaders’ Declaration urges international standard setting bodes such as the Financial Stability Board to work with various agencies on the implementation of proportionality that is often already imbedded in global standards.

World Council has made this a priority of its advocacy efforts joining with many of its G20 members to urge their respective finance ministers to support this effort.  The G20 has heeded World Council’s call to address financial inclusion in past years declarations and specifically last year where they embraced proportionality included in the newly adopted sustainability disclosures issued by the International Sustainability Standards. 

This year’s Summit will occur later this year in November.  A copy of the letter can be viewed here.

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G20

COBA’s Advocacy Success Leads to Australian Regulatory Roadmap

Years of diligent advocacy work by the Customer Owned Banking Association (COBA) has resulted in the Treasurer of Australia establishing a regulatory roadmap to ensure the country’s major financial service regulators coordinate and provide visibility of proposed regulatory reforms going forward. COBA, World Council’s direct member organization in Australia, spent the last several years meeting with key government officials and regulators to advocate for the creation of a financial sector regulatory grid.

Based on these efforts, the new regulatory roadmap will help regulators avoid duplication, engage with financial service businesses and improve implementation practices. This change to coordinate and provide a regulatory roadmap will particularly help medium-sized and smaller financial service providers, allowing them to better anticipate regulations that might impact their business in the future and the resources needed for compliance.

The regulatory roadmap is based on a system currently used in the United Kingdom, and will be a rolling, 24-month program of regulatory initiatives impacting the financial sector. The roadmap will be updated twice a year and include proposed legislation, rules and regulations, and standard making, consultation processes and data collection processes. This advanced planning and coordination is expected to facilitate better engagement between financial service providers and regulatory agencies with coordinated priorities and greater visibility to better discuss regulatory implementation methods.  

Click here to read the Treasurer’s announcement and learn more about the key regulatory advocacy success of COBA.

Basel Committee Announces Core Principles Revision and Other Updates

The Basel Committee on Banking Supervision (the Committee) recently met to discuss key items impacting the financial service markets.

The Basel Committee announced it will be revising the Core principles for effective banking supervision (Core Principles). Following comment letters from stakeholders, including the World Council of Credit Unions, the Committee approved the first revisions to the Core Principles since 2012. The final standards will be published following the International Conference of Banking Supervisors at the end of April. 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. 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 disproportionate burden recent regulatory guidance places on credit unions in key areas, such as operational resilience, stress testing, and climate risk management. Click here to read the comment letter submitted by World Council.

During their recent meeting the Committee also discussed developing risks to the global banking system, window-dressing behavior by large banks, and the status of Basel III implementation.

The Committee discussed climate-related financial risks as one of the top ongoing and developing risks for financial institutions. It discussed scenario analysis as a tool for assessing the resilience of financial institutions business models, strategies, and overall risk profile. A discussion paper will be published in the coming months on the use of climate scenario analysis by banks and supervisors. The Committee also discussed sector risks, including segments of commercial real estate facing headwinds and banks’ interconnections with non-bank financial intermediaries.

Finally, the Committee reported on the implementation status of the outstanding Basel III standards, issued in 2017. Implementation is progressing but is uneven between countries. The Committee approved a workplan for the jurisdictional assessments of the implementation of these standards as part of the Committee’s Regulatory Consistency Assessment Programme.  

Click here for more information on the updates provided by the Basel Committee.

 

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Basel

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