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.

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.


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.


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.


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.”

Financial Stability Board

Basel Committee Reaches Provisional Agreement on Implementation of Basel III Reforms Including Enhanced Proportionality Rules

After negotiations between the Council presidency and the European Parliament, the Basel Committee has reached a provisional agreement on the implementation of Basel III regulatory reforms, specifically involving amendments to the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD). The Basel Committee hopes these reforms will strengthen the resilience of banks operating within the European Union. 

Negotiations also led to additional agreements related to the provisional agreement which include implementation of the “output floor, limiting banks' variability of capital levels computed by using internal models, and the appropriate transitional arrangements to allow sufficient time for market players to adapt.” They also agreed on improvements to credit risk, market risk and operational risk; enhancement to proportionality rules, specifically for small and non-complex financial institutions; a transitional prudential regime for crypt assets; amendments to improve ESG risk management, and harmonization of other frameworks to strengthen bank resiliency.

More information on the provisional agreement reached on Basel III reforms is available here.


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.

Financial Stability Board

FSB Consults Third-party Risk Management Toolkit

The Financial Stability Board (FSB) published for public consultation a toolkit for financial authorities and financial institutions as well as service providers for their third-party risk management and oversight.

The toolkit was developed against a backdrop of digitalisation of the financial services sector and growing reliance of financial institutions on third-party service providers for a range of services, some of which support their critical operations. These dependencies can bring many benefits to financial institutions including flexibility, innovation and improved operational resilience. However, if not properly managed, disruption to critical services or service providers could pose risks to financial institutions and, in some cases, financial stability.

The primary emphasis of the toolkit is on critical services given the potential impact of their disruption on financial institutions’ critical operations and financial stability. In light of changing industry practices and recent regulatory and supervisory approaches to operational resilience, the toolkit takes a holistic view of third-party risk management, which is wider than the historical focus on outsourcing. The principle of proportionality is applicable throughout the toolkit, allowing the tools to be adapted to smaller, less complex institutions or to intra-group third-party service relationships.

The toolkit aims to:

  • Reduce fragmentation in regulatory and supervisory approaches to financial institutions’ third-party risk management across jurisdictions and different areas of the financial services sector;
  • Strengthen financial institutions’ ability to manage third-party risks and financial authorities’ ability to monitor and strengthen the resilience of the financial system; and
  • Facilitate coordination among relevant stakeholders (i.e. financial authorities, financial institutions and third-party service providers).
A copy of the consultation ca be viewed here.
Financial Stability Board

ISSB Issues Inaugural Climate Risk and Sustainability Disclosure Standards; Includes Proportionality

The International Sustainability Standards Board (ISSB) issued its inaugural standards—IFRS S1 and IFRS S2 — related to sustainability disclosures for capital markets worldwide.  The Standards will help to improve trust and confidence in company disclosures about sustainability to inform investment decisions.  The standards are designed to create a common language for disclosing the effect of climate-related risks and opportunities on a company’s prospects.  These standards will likely for the basis for disclosures that will ultimately be incorporated by supervisors for credit unions.

IFRS S1 specifically provides a set of disclosure requirements designed to enable companies to communicate to investors about the sustainability-related risks and opportunities they face over the short, medium and long term. IFRS S2 sets out specific climate-related disclosures and is designed to be used with IFRS S1.

Together these standards support a comprehensive global baseline of sustainability-related disclosures that demonstrate the widespread demand for a consistent understanding of how sustainability factors affect companies’ prospects.  The ISSB Standards are designed to ensure that companies provide sustainability-related information alongside financial statements—in the same reporting package.

Of importance to credit unions are the mechanisms included to address proportionality.  This includes the use of reasonable and supportable information that is available without undue cost or effort and the consideration of an entity’s skills, capabilities, and resources.  This standard should allow for the implementation of disclosures that minimize the cost and expenditures necessary by credit unions to prepare their reporting (once implemented at the national-level).

WOCCU has been advocating for the inclusion of proportionality measures into the standard at all levels of development, including directly with the ISSB, the Basel Committee, and the Financial Stability Board, all of whom have been consulted during the development of this standard.

Work now will turn to jurisdictions and companies to work with the Transition Implementation Group that is being launched to support implementation of the standard.

A copy of the proposal can be viewed here.

International Accounting Standards Board

Basel Committee Meets on Market Developments, Risks, and Policy and Supervisory Initiatives

On June 6, 2023, the Basel Committee on Banking Supervision followed up on its meeting in Hong Kong in March and met to further discuss recent financial and market developments, global banking system risks, and policy and supervisory developments. Specifically, the Basel Committee assessed current instabilities surrounding the banking system and the need to strengthen supervisory effectiveness. The Committee confirmed that all aspects of Basel II will be implemented “in full and consistently”. They are reviewing its Basel Core Principles (Core principles for effective banking supervision), and will consult on revisions to the principles with stakeholders by publishing a consultation paper next month.

The Basel Committee highlighted the following points regarding current banking turmoil:

  • “The first and most important source of financial and operational resilience comes from banks' own risk management practices and governance arrangements.
  • It is critical that supervisors have the ability and willingness to act early and effectively to identify and promptly correct weaknesses in bank practices.
  • The Basel III reforms that have been implemented to date helped shield the global banking system and real economy from a more severe banking crisis. Members unanimously reaffirmed their expectation of implementing all aspects of the Basel III framework in a full and consistent manner, and as soon as possible, in order to further enhance the resilience of the global banking system.”

The Committee also discussed prudential treatment of banks’ cryptoassets exposure and potential revisions to existing standard, and climate-related financial risks as it relates to its development of a Pillar 3 framework addressing requirements for disclosure of a bank’s exposure to these risks. The framework will work in tandem with the other authorities such as the ISSB and the Committee will publish a consultation paper by the end of the year. Further, the Basel Committee “reviewed and approved the assessment reports on the United States' implementation of the Net Stable Funding Ratio and large exposures framework” under its Regulatory Consistency Assessment Programme.

More information on the Basel Committee’s June 6th meeting can be found here.


Statistical release: BIS international banking statistics and global liquidity indicators released

The Bank for International Settlements issued its BIS locational banking statistics (LBS)  on global liquidity indicators.  The key findings of this report are as follows:

  • Banks' cross-border claims fell by $1.4 trillion in Q4 2022, slowing the year-on-year (yoy) growth rate to 6%. Both lower bank credit (ie loans and holdings of debt securities) and a drop in the market value of banks' derivatives and other residual instruments contributed to the decline.
  • Global cross-border bank credit (ie loans and holdings of debt securities) fell by $749 billion, or $400 billion on a seasonally adjusted basis. Euro-denominated credit declined by $231 billion after expanding earlier in the year.
  • Cross-border bank credit to emerging market and developing economies (EMDEs) fell by $179 billion in Q4 2022 due to weaker dollar lending. Credit to the Asia-Pacific region contracted the most.
  • The BIS global liquidity indicators (GLIs) show a large contraction in dollar credit to non-banks in EMDEs in Q4 2022. Dollar credit to EMDEs shrank by 4%, a rate last seen during the Great Financial Crisis of 2007–09.

Given the recent failures around the world of banks, largely as a result of aggressive action to contain inflation, watching this data may give insight into future policy on liquidity and capital in the future.

Bank of International Settlements

IASB Plans to Propose Amendments to the IFRS for SMEs Standard

The International Accounting Standards Board (IASB) has plans to amend the IFRS for SMEs Standard on June 1, 2023 through publication of its Exposure Draft International Tax Reform—Pillar Two Model Rules—Proposed Amendments to the IFRS for SMEs Standard, which will be available through the Amendments to the IFRS for SMEs Accounting Standard—International Tax Reform—Pillar Two Model Rules project page and its Open for comment section.

“The IASB tentatively decided to propose amendments to the IFRS for SMEs Standard:

  • to introduce a temporary exception to the requirements in Section 29 of the Standard for an entity to recognise and disclose information about deferred tax assets and liabilities related to Pillar Two income taxes;
  • to make the temporary exception mandatory;
  • not to specify how long the temporary exception will be in place;
  • to require an entity to disclose that it has applied the temporary exception;
  • to require an entity to apply these amendments immediately upon their issuance and retrospectively in accordance with Section 10 of the Standard (‘Accounting Policies, Estimates and Errors’);
  • to require an entity to disclose separately its current tax expense (income) related to Pillar Two income taxes; and
  • to require an entity to apply this disclosure requirement for annual reporting periods beginning on or after 1 January 2023.”

More information on the IASB proposed amendment to the IFRS for SMEs Standard for OECD tax reform is available here.


IASB to Undertake Project on Climate-Related Risks in Financial Statements

The International Accounting Standards Board (IASB) met in March to initiate its project to examine how to improve companies’ disclosures on climate-related risks. In March 2021, the IASB published a request for information on its Third Agenda Consultation, and received feedback that:

  • “climate-related risks are often perceived as remote, long-term risks and may not be appropriately considered in the financial statements; and
  • investors need better qualitative and quantitative information about the effect of climate-related risks on the carrying amounts of assets and liabilities reported in the financial statements.”

Some of the questions the IASB received from the open consultation included, “why companies that are expected to be affected by climate-related risks do not provide information about these effects in their financial statements; why companies that have made net zero commitments do not recognize liabilities or impair the value of their assets as a result of those commitments; and how companies should factor long-term uncertainties into the measurement of amounts in the financial statements.” The project expects to address these questions and consider any additional amendments, guidance, and educational materials that may be effective to address stakeholder concerns. The project will align with the ISSB’s (International Sustainability Standards Board) standards and will use the ISSB’s final deliberations on its initial set of standards as a guide.


More information on the IASB’s project on climate-related risks in financial statements is available here.


Basel Committee Meets to Discuss Market Developments and Risks, and Policy/Supervisory Initiatives

In March of this year 2023, the Basel Committee on Banking Supervision met in Hong Kong and virtually to discuss current market developments, risks and vulnerabilities to the global banking system, and policy and supervisory initiatives including review of its Core Principles for Effective Banking Supervision. Recent market developments have highlighted the need for “resilient global banking system underpinned by effective bank governance and risk management practices, robust regulatory standards, and strong supervision supported by proactive cross-border cooperation.” According to the Basel Committee, current risks include inflation, lower growth and geopolitical tensions; and in response the Committee plans to implement the Basel III framework “in a full and consistent manner”.

The Committee also examined the Pillar 3 disclosure framework for climate-related financial risks and how it will coincide with the International Sustainability Standards Board’s (ISSB) disclosure initiatives. The Committee further reviewed progress to its Core principles for effective banking supervision ("Basel Core Principles"), and approved a workplan related to its global bank prudential standard for cryptoassets and work programme, to mitigate risks to the global banking system.

 More information on the Basel's Committee's meetings to discuss market developments and risks is available here


FSI Issues Executive Summary of Proportionality in Banking Supervision

The Financial Stability Issued and Executive Summary of Proportionality in Banking Supervision to summarize various proportionality approaches to implementing the Basel III Framework.  Notable in the summary is the reiteration of the principles of proportionality built into the Basel III Framework and most recently elaborated on the Basel Committee on Banking Supervision’s High-level Considerations on Proportionality.

Notably the summary indicates that proportionality provides supervisory authorities with options for adopting simpler standardized approaches and that in some jurisdictions, even the simpler approaches might require further adaptation. 

The summary notes that the Basel Framework is the full set of standards for the oversight of internationally active banks (IABs) in member jurisdictions of the Basel Committee on Banking Supervision (BCBS). This framework includes the Core Principles for Effective Banking Supervision (BCPs) and regulatory (Pillar 1), supervisory (Pillar 2) and disclosure (Pillar 3) standards. Although the BCPs are universally applicable, the remaining elements of the Basel Framework (the three pillars) are the standard for IABs. To accommodate the diversity of banks and banking systems, the BCPs embed the concept of proportionality. Proportionality allows assessments of compliance with the BCPs that are commensurate with the risk profile and systemic importance of a broad spectrum of banks.

This summary makes it clear that national-level regulators have the appropriate tools to tailor regulations more appropriate for smaller, less-complex community based cooperatives such as credit unions.

A copy of the Executive Summary can be viewed here.


Financial Stability Board Cyber Incident Reporting includes WOCCU Recommendations

The Financial Stability Board issued its report setting out 16 recommendations to address these issues with a view to promote best practices in cyber incident reporting. Included in the Recommendations to Achieve Greater Convergence in Cyber Incident Reporting, were several recommendations made by World Council including proportionality language to help smaller community based financial institutions and language surrounding feedback loops to assist credit unions in defending themselves against cyber-attacks.

The report draws from the FSB’s body of work on cyber, including engagement with external stakeholders, the report identifies commonalities and details practical issues associated with the collection of cyber incident information from FIs and the onward sharing between financial authorities. These practical issues include:

  1. operational challenges arising from the process of reporting to multiple authorities;
  2. setting appropriate and consistent qualitative and quantitative criteria/thresholds for reporting;
  • establishing an appropriate culture to report incidents in a timely manner;
  1. inconsistent definitions and taxonomy related to cyber security;
  2. establishing a secure mechanism to communicate on cyber incidents; and
  3. legal or confidentiality constraints in sharing information with authorities across borders and sectors.

A copy of the report can be viewed here.


Financial Stability Board

FATF Finalizes Guidance On Beneficial Ownership of Legal Persons

The Financial Action Task Force finalized its guidance to provide tougher global beneficial ownership standards in its Recommendation 24 by requiring countries to ensure that competent authorities have access to adequate, accurate and up-to-date information on the true owners of companies. This guidance will help implement the revised Recommendation 24.  If implemented properly by national-level authorities, it will provide efficient and rapid access to the information for use by financial institutions including credit unions to help with their AML/CFT responsibilities with respect to legal entities. 

WOCCU advocated for this approach which should help ease regulatory burdens associated with opening accounts and doing business with legal entities.  The guidance will help countries identify, design and implement appropriate measures in line with the revised Recommendation 24 to ensure that beneficial ownership information is held by a public authority or body functioning as a beneficial ownership registry, or an alternative mechanism is readily available for use by credit unions.  Further,  the Standard will help prevent the organised criminal gangs, the corrupt and sanctions evaders from using anonymous shell companies and other businesses to hide their dirty money and illicit activities.

A copy of the finalized standard can be viewed here.


IASB Initiates Project to Consider Climate-related Risks in Financial Statements

The International Accounting Standards Board (IASB) has added a project to its work plan to explore whether and how companies can provide better information about climate-related risks in their financial statements.

The initiation of the project responds to feedback received from the IASB’s recent Agenda Consultation for the IASB to enhance the reporting of climate-related risks in the financial statements.

In undertaking the project, the IASB will consider the work of the International Sustainability Standards Board (ISSB) to ensure any proposals work well with IFRS Sustainability Disclosure Standards and that any information required by the two boards would be complementary. The first two IFRS Sustainability Disclosure Standards are due to be issued by the end of Q2 2023.

The project was discussed at a recent IASB meeting noting that the project will research to what extent the educational material published in 2020 is helping companies reflect the effects of climate‑related risks in the financial statements, and what actions, if any, the IASB could take to further improve information about these matters.

World Council recently released its Guide to International Sustainable Finance Regulations “What Credit Unions Should Know About Sustainable Finance”, a guide to help credit unions understand many of the international standards and emerging regulatory frameworks surrounding climate-related and sustainable finance issues wherein it discusses recent developments in disclosures by the ISSB.

A copy of the press release can be viewed here.

International Accounting Standards Board

BIS's Project Nexus Prototype Successfully Links Eurosystem, Malaysia and Singapore Payments Systems

The BIS Innovation Hub Singapore Centre and partners announced the successful connection of the test versions of three established IPS using the Nexus model and outlined the next phase of the project to work on the real-world potential of a multilateral network that could be scaled up across more countries.  The press release noted the following:

  • To enhance cross-border payments, the BIS Innovation Hub Singapore Centre developed the Nexus concept of a first-of-its-kind multilateral network connecting multiple domestic instant payment systems (IPS).
  • Nexus prototype successfully connected the test IPS of the Eurosystem, Malaysia and Singapore, allowing payments to be sent across the three using only mobile phone numbers.
  • In the next phase, BIS and the central banks of Indonesia, Malaysia, the Philippines, Singapore and Thailand will jointly work towards connecting their domestic IPS through Nexus.

The Nexus report provides details on the early experiments and technical specifications for the multilateral interlinking of payment systems. The success of the experiment paves the way for the BIS Innovation Hub Singapore Centre to explore the practical applications of a distributed multilateral network.

This efforts supports the G20 priorities of improving the cost, speed, access and transparency of cross-border payments by connecting domestic IPS across multiple countries through a standardised and multilateral approach.  The Innovation Hub's Singapore Centre is now collaborating with these central banks to facilitate their design processes, as they aim to connect their domestic payment systems.

This development is significant for credit unions in that it demonstrates efforts to transform the payments space and can have a profound effect on credit unions’ participation and engagement in the payments space.

Bank of International Settlements

Basel Committee Discusses Recent Bank and Market Developments

The Basel Committee on Banking Supervision met in Hong Kong to take stock of recent developments and risks in the global banking system along with discussing a range of policy initiatives.

In particular the Committee noted that the risks of high inflation, lower growth and geopolitical tensions are posing risk management challenges to banks. Years of unprecedentedly low interest rates underpinned the build-up of leverage across household and corporate sectors. As most central banks raise interest rates to combat inflation, borrowers are now facing sharply rising debt service burdens. A broad-based repricing in asset markets could also expose banks to additional risks.

The Basel Committee directed banks and supervisors to be vigilant to the evolving outlook to ensure that the global banking system is resilient. In addition, the Committee agreed to take stock of the regulatory and supervisory implications stemming from recent events, with a view to learn lessons.

On other related topics the Basel Committee discussed the following policy initiatives:

  1. Climate-related financial risks

The Committee discussed its work related to the development of a Pillar 3 disclosure framework for climate-related financial risks. The purpose of the framework is to provide additional bank disclosures about the prudential risks. This framework would complement, and be interoperable with, parallel disclosure initiatives under way by the International Sustainability Standards Board and other authorities. The Committee will issue a consultation paper on the proposed

  1. Cryptoassets

Following the publication of a prudential treatment for banks' exposures to cryptoassets last year, the Committee approved a workplan to continue to assess and mitigate risks from cryptoassets to the global banking system. This includes a set of targeted reviews of the prudential treatment, including with regard to the treatment of permissionless blockchains and the eligibility criteria for "Group 1" stablecoins. The Committee will also continue to monitor banks' cryptoasset activities and exposures, including their role as potential issuers of stablecoins and tokenised deposits, custodians of cryptoassets and interconnections with other nodes of the cryptoasset ecosystem.

  1. Implementation of Basel III reforms

The Committee members unanimously reaffirmed their expectation of implementing all aspects of the Basel III framework in a full and consistent manner, and as soon as possible, in order to further enhance the resilience of the global banking system and provide a regulatory level playing field for internationally active banks.

 A copy of the press release can be viewed here.


WOCCU Urges Greater Flexibility for Credit Unions in IASB Standard

World Council of Credit Unions (World Council) urged the IASB to provide greater clarity in its proposed revisions to the IFRS’ Exposure Draft for IFRS for SMEs Accounting Standard (Exposure Draft), that would clearly delineate that credit unions can used the relaxed standard for its allowance for loan and lease loss accounting (IFRS 9 or CECL).  This standard is currently utilized in several countries for credit unions, however, many countries due to the current definition of “publicy accountable” contained in the current definition.  Some jurisdiction tend to view credit unions as “publicly accountable” even though the term as used in the standard tend to apply to publicly traded vs. non-publicly traded entities, thus acting as a barrier to utilization of the IFRS for SME’s standard.  Other countries have allowed accounting standards based on the IFRS for SME standard for credit unions.

While the language proposes changes that would bring some greater clarity to the definition, WOCCU urged IASB to provide certainty in the revisions noting that credit unions due to their cooperative model, their relatively small size as compared to banks, and the use of financial statements by their members would warrant such a treatment.

Explicitly allowing use of the IFRS for SME standard would prove a valuable contribution to the objective of financial inclusion, particularly in developing countries where pro forma accounting systems are imposed without regard for the size and complexity of the institution subject to the accounting standard.  Allowing credit unions to state their financials in conformity with the IFRS for SME standard will not only reduce compliance burdens and provide proportionality but will likely improve the quality of financials provided to their members and regulators.

A copy of the letter can be viewed here.

International Accounting Standards Board

World Council Urges More Action by G20 on Financial Inclusion

The World Council of Credit Unions today urged the G20 to take further action to increase financial inclusion through credit unions worldwide.  Specifically, World Council is requesting that the G20 provide direction to international standard setting bodies to work with national level authorities and supervisors on proportional tailoring of regulations that will allow the unique not-for-profit cooperative model of credit unions to increase access to responsible and affordable financial services to rural and underserved communities.

“While the G20 has embraced financial inclusion as the way to reduce inequality and support inclusive and sustainable growth, they need to take the next step to ensure that local, community based financial institutions such as credit unions that are best suited to achieve their goals do not have unnecessary barriers in their way.  Implementation of proportionality at the national level is key to this success,” said Andrew Price, World Council Senior VP of Advocacy and General Counsel.

These comments were elaborated on in a letter to the finance minister of India who is the Presidency of the G20 New Delhi Summit 2023.  This year it will culminate in the issuance of a Leaders’ Declaration sometime in September in 2023.  World Council is urging the G20 to adopt language furthering the ability of credit unions to address financial inclusion. 

In particular, the letter notes financial inclusion reduces inequality, which in turn supports inclusive and sustainable growth by allowing the vulnerable to remain healthy, stay out of poverty, pay for education and accumulate human capital. The proportionate application of International Standards for financial regulation is the key and a critical factor in enabling innovative financial inclusion through credit unions and achieving this goal.  The request would insure that international standard setting bodies work with national-level authorities to ensure the proper implementation of proportionality.

A copy of the letter can be viewed here.


FSB Publishes Report on Priority Actions for Enhancing Cross-Border Payments

On February 23, 2023, the Financial Stability Board (FSB) released its G20 Roadmap for Enhancing Cross-Border Payments, Priority actions for achieving the G20 targets, which was provided to the G20 Finance Ministers and Central Bank Governors ahead of their meeting that took place on February 24-25th. The report outlines analysis and stocktakes (including stockholder feedback) garnered over the first two years following its endorsement of its Roadmap for Enhancing Cross-Border Payments, released in 2020. In addition to highlighting its priority actions for attaining G20 targets, the report details actions to meet the quantitative targets by 2027 to “provide accountability and ambition”. To address the FSB’s priorities, it will work with the Committee on Payments and Market Infrastructures (CPMI) under two industry taskforces; and the International Monetary Fund (IMF) and World Bank will give technical assistance to jurisdictions outside of the G20’s purview.

The next phase of the FSB’s work on enhancing cross-border payments will consist of three priority themes:

  • Payment system interoperability and extension. Actions include the extension of RTGS operation hours, interlinking payment systems, creating a forum for central banks to exchange practices, and finalizing requirements for cross-border payment service level agreements.
  • Legal, regulatory and supervisory finalizing frameworks. Actions include promoting efficient legal, regulatory and supervisory environment for cross-border payments, improving consistency of bank and non-bank regulation and supervision, enhancing information provided to end-users, and updating the application of AML/CFT rules.
  • Cross-border data exchange and message standards. Actions include facilitating cross-border data exchange and standardizing messaging formats, enhancing interaction between data frameworks and cross-border payments, improving API coordination, and exploring enhanced use of the legal entity identifier (LEI).

More information on the FSB’s its G20 Roadmap for Enhancing Cross-Border Payments, Priority actions for achieving the G20 targets is available here.

Financial Stability Board

European Council and Parliament Reach Provisional Agreement on European Green Bonds

On February 28, 2023, the European Council and European Parliament reached a provisional agreement on the creation of European Green Bonds (EuGB) as another step in its strategy to finance sustainable growth and “transition to a climate-neutral, resource-efficient economy”. It must be adopted by both institutions for finalization and will apply 12 months after it is entered into force. The green bonds will help issuers substantiate that the green projects they are funding are legitimate and supported by the EU taxonomy, as well as to reduce greenwashing. National competent authorities of each member state will supervise the issuance of green bonds.

In addition to a registration system for the green bonds, a supervisory framework, and voluntary disclosure requirements, “This regulation lays down uniform requirements for issuers of bonds that wish to use the designation ‘European green bond’ or ‘EuGB’ for their environmentally sustainable bonds that are aligned with the EU taxonomy and made available to investors globally.” All proceeds will be invested in economic activities under the EU taxonomy. For sectors that are not covered by the taxonomy, specific activities will be subject to a 15% flexibility pocket.

More information on the green bonds provisional agreement is available here

Council of the European Union

Aligning Operating Hours Across Jurisdictions Could Improve Cross-Border Payments

The Bank for International Settlements (BIS), Committee on Payments and Market Infrastructures (CPMI) released a report, Operational and technical considerations for extending and aligning payment system operating hours for cross-border payments: An analytical framework, to aid central banks and operators who plan to extend real-time gross settlement (RTGS) system operating hours with a systemic approach to render these services effectively. The report works in conjunction with the BIS May 2022 report, Extending and aligning payment system operating hours for cross-border payments. According to the report, “An extension and alignment of payment system operating hours across jurisdictions could help to speed up cross-border payments, especially between jurisdictions with significant time zone differences. It could also improve liquidity management, reduce settlement risk and enhance the performance of cross-border payment arrangements.”

While the 2022 report focused on three options for extending RTGS system operating hours to enhance for cross-border payments, including incremental increases in operating hours on current operating days, inclusion of current non-operating days, and extension to 24/7 operating hours, the 2023 report gives attention to current operating days as a short term strategy. Medium and long-term strategies are still under consideration.  

More information on BIS’ report on Operational and technical considerations for extending and aligning payment system operating hours for cross-border payments: An analytical framework, is available here.

Bank of International Settlements