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IADI Includes Proportionality Principle in Risk Management Guidelines

The International Association of Deposit Insurers (IADI) asked for public comment on their Guidance Paper, ‘Risk Management and Internal Control System of Deposit Insurers’. The Paper provided ten Guidance Points to address risk management in Deposit Insurers (DIs). Most notably, the Paper included Guidance Points based on the principle of proportionality and additionally provided suggestions for minimum requirements more appropriate for smaller DIs. WOCCU commented on the Paper and stated its support for IADI’s proportional based guidelines and further requested clear and direct guidance on proportionality so that national regulators have the green light to properly tailor regulations to smaller financial institutions such as credit unions. WOCCU’s comment letter in response to IADI’s above referenced Guidance Paper on risk management can be found here.

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IADI

IASB Delays Standard on Classification of Liabilities

The International Accounting Standards Board (IASB) has issued an amendment to dever by one year the effective date of Classification of Liabilities as Current or Non-Current, which amends IAS 1, Presentation of Financial Statements. WOCCU supported this delay in light of the COVID-19 pandemic.  The proposal was issued in January 2020 for annual reporting periods beginning on or after January 1, 2022.  They standard is now effective for annual reporting periods beginning on or after January 1, 2023.

WOCCU welcomes this delay as it should provide regulatory relief to credit unions during the COVID-19 pandemic.

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International Accounting Standards Board

FSB Writes G20 On Cross-Border Payments Reform

The Financial Stability Board (FSB)  published a letter to the G20 from the FSB Chair, Randal K. Quarles, welcoming the report published by the Committee on Payments and Market Infrastructures (CPMI), which sets out building blocks for a roadmap to enhance cross-border payments.

The publication of the CPMI report marks the second of a three-stage process to develop a roadmap to enhance cross-border payments. It sets out the necessary elements to address the challenges of high costs, low speed, limited access and insufficient transparency of cross-border payments, highlighted by the first-stage FSB report published in April.  We anticipate the FSB to publish a roadmap as a third and final stage. .

A copy of the report can be viewed here.

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Financial Stability Board

FATF Releases Business Bulletin Updates

The Financial Action Task Force (FATF) released its Business Bulletin for July 2020 highlighting priorities for FATF under the German Presidency for the years 2020-2022 and FATF objectives under the Chinese Presidency. The bulleting also highlighted their Covid-19 webinar on the money laundering risk landscape.

FATF’s priorities for the first two-year Plenary period during German Presidency include:

  • Digital Transformation of anti-money laundering and counter terrorist financing (AML/CFT)
  • Financing of ethnically or racially motivated terrorism
  • Money laundering and migrant smuggling
  • Environmental crime
  • Illicit arms trafficking

FATF outlined the following program objectives planned under the Chinese Presidency regarding money laundering and terrorist financing (ML/TF) risks, including:

  • Virtual Assets and Virtual Asset Service Providers (VASPs), Guidance for a Risk-Based Approach,
    12-Month Review of Revised FATF Standards and FATF Report to the G20 on So-called Stablecoins
  • A landmark paper on the use of Digital I D
  • Best Practices Paper on Beneficial Ownership
  • Strategic Review, agreeing on the future direction and framework for FATF mutual evaluations and follow-up processes
  • Supervisors' Forums to improve the effectiveness of supervision
  • A new e-learning platform for the Global Network membership
  • Report on Money Laundering and the Illegal Wildlife Trade
  • Responses to COVI D-19
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FATF

WOCCU Supported Changes Adopted in Basel Credit Valuation Adjustment Risk Standard

The Basel Committee on Banking Supervisiony published an updated standard for the regulatory capital treatment of credit valuation adjustment (CVA) risk for derivatives and securities financing transactions.

The revisions for the regulatory capital treatment of CVA risk include:

  • recalibrated risk weights;
  • different treatment of certain client cleared derivatives; and
  • an overall recalibration of the standardised and basic approach.

WOCCU supported bringing the Credit Valuation Adjustment framework in alignment with the finalization of the market risk framework completed in 2019. 

A copy of the standard can be viewed here.

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Basel

WOCCU Praises EU COVID-19 Relief Measures

The European Union adopted temporary banking rules in order to maximize the capacity of banks to lend money and support households and businesses to recover from the COVID-19 crisis.

The banking package targeted changes to the capital requirements regulation (CRR 2). These changes will allow credit institutions to fully play their role in managing the economic shock that stems from the COVID-19 pandemic by fostering credit flows.

More specifically, the targeted amendments concern:

  • changes to the minimum amount of capital that banks are required to hold for non-performing loans (NPL) under the "prudential backstop". In particular, the preferential treatment of NPLs guaranteed by export credit agencies will be extended to other public sector guarantors in the context of measures aimed at mitigating the economic impact of the COVID-19 pandemic.
  • the extension by two years of transitional arrangements related to the implementation of the international accounting standard IFRS 9. This will allow banks to mitigate the potential negative impact of a likely increase in banks' provisions for expected credit losses.
  • the temporary reintroduction of a prudential filter for sovereign bond exposures which will mitigate the impact of the current volatility of financial markets on public debt.
  • additional flexibility for supervisors to mitigate negative effects of the extreme market volatility observed during the COVID-19 pandemic, in particular by excluding "overshootings" that occurred in 2020 and 2021 in banks' internal models for market risks.
  • targeted changes to the calculation of the leverage ratio (i.e. the ratio between banks' capital and its exposures) and a delay in the introduction of the leverage ratio buffer by one year to January 2023.
  • transitional arrangements for exposures to national governments and central banks denominated in a currency of another member state, in order to support funding options in non-euro member states mitigating the consequences of the COVID-19 pandemic.
  • the earlier introduction of some capital relief measure for banks under CRR 2, most notably with respect to preferential treatment of certain loans backed by pensions or salaries and their SMEs and infrastructure loans, thus encouraging the credit flow to pensioners, employees, businesses and infrastructure investments.

WOCCU praises these changes adopted by the European Union and urges national-level regulators in the EU to provide similar relief for those credit unions otherwise exempt from the Capital Requirments Directive (CRD V).

Amendments to the capital requirements regulation in response to the COVID-19 pandemic

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ENCU

FSB and Basel Committee Move to Transition Away from LIBOR by End of 2021

The Financial Stability Board (FSB) and Basel Committee on Banking Supervision (BCBS) published a report entitled, Supervisory issues associated with benchmark transition: Report to G20, which outlines supervisory recommendations LIBOR transition. The report concludes that, “Continued reliance of global financial markets on LIBOR poses clear risks to global financial stability. Transition away from LIBOR by end-2021 requires significant commitment and sustained effort from both financial and non-financial institutions (FIs and non-FIs) across many jurisdictions.” The report also includes surveys initiated by the FSB, the BCBS and the International Association of Insurance Supervisors (IAIS), developed to address remaining challenges to the benchmark transition.

The report outlined three recommendations that support LIBOR transition in jurisdictions with LIBOR exposures:

  • Identification of transition risks and challenges – authorities and standard-setting bodies to issue public statements to promote awareness and engage with trade associations, and authorities to undertake regular surveys of LIBOR exposure and to request updates from financial institutions.
  • Facilitation of LIBOR transition – authorities to establish a formal transition strategy supported by adequate resources and industry dialogue. Supervisory authorities should consider increasing the intensity of supervisory actions when the preparatory work of individual banks is unsatisfactory.
  • Coordination – authorities to promote industry-wide coordination, maintain dialogue on the adoption of fallback language, consider identifying legislative solutions, where necessary, and exchange information on best practices and challenges. The FSB and the standard-setting bodies will coordinate at the international level to identify key common metrics for monitoring transition progress.”

More information on the BSB and BCBS’ LIBOR transition report can be found here and here.

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Basel, Financial Stability Board

Basel AML/CFT Guidance includes WOCCU Recommendations on Proportionality/Financial Inclusion

The Basel Committee on Banking Supervision today issued the updated version of its guidelines on Sound management of risks related to money laundering and financing of terrorism, with guides on the interaction and cooperation between prudential and anti-money laundering and combatting the financing of terrorism (AML/CFT) supervisors.

The revisions set out principles and recommendations for information exchange and cooperation in relation to: (i) internal procedures or a bank/credit union; (ii) ongoing supervision; and (iii) enforcement actions. Also, possible mechanisms to facilitate such cooperation in the jurisdictional and international context are provided.  The guidelines are consistent and complimentary to those standards issued by the Financial Action Task Force (FATF).

WOCCU commented on this proposal in early 2020 urging reinforcement of the principles of proportionality and risk-based approaches to AML/CFT noting that regulatory burdens often fall disproportionately on credit unions often preventing access to responsible and affordable credit to underserved communities. 

The issuance by the Basel Committee includes specifically with respect to AML/CFT burdens should be "
proportional and risk-based, informed by banks’ own risk assessment of ML/FT risks."  Further, with respect to Member/Customer Due diligence the guidance notes that "It is important that the customer acceptance policy is not so restrictive that it results in a denial of access by the general public to banking services, especially for people who are financially or socially disadvantaged."  

WOCCU welcomes this guidance which should provide direction to national-level regulators to properly tailor AML/CFT requirements for credit unions which will in turn promote financial inclusion.

A copy of the newly issued guidance can be viewed here.

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Basel

FSB Consults on Too-Big-To-Fail Refomrs

The Financial Stability Board issues a consultation on the evaluation of the effects of too-big-to-fail (TBTF) reforms fro systemically important banks.  The evaluation's main findings are as follows:

  • TBTF reforms have made banks more resilient and resolvable;
  • The benefits of the reforms significantly outweigh the costs; and
  • There are still gaps that need to be addressed.

The reforms being evaluated include: (i) standards for additional loss absorbency through capital surcharges and total loss-absorbing capacity requirements; (ii) recommendations for enhanced supervision and heightened supervisory expectations; and (iii) policies to put in place effective resolution regimes and resolution planning to improve the resolvability of banks.

A copy of the consultation can be viewed here.

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Financial Stability Board

Basel Committee Discusses COVID-19

The Basel Committee met to discuss the impact to date of the coronavirus disease (Covid-19) pandemic on the global banking system.

The Committee noted that the measures taken to date at the onset of the pandemic have helped mitigate some of the short-term financial stability risks. All members reaffirmed their expectation of full, timely and consistent implementation of all Basel III standards based on the revised timeline endorsed by the Group of Governors and Heads of Supervision.

The Committee noted that the pandemic has entered a new phase and that the impact and response vary across jurisdictions and the global economic outlook remains uncertain. Banks and supervisors must remain vigilant to the risks and vulnerabilities stemming from the pandemic to ensure that the global banking system remains financially and operationally resilient.

They noted that the Basel III Framework includes capital buffers designed to absorb losses in times of stress and to help maintain the flow of credit to the real economy.  Using these capital resources to support the real economy and absorb losses should take a priority during the crisis. 

Additionally, the Committee approved two measures that were commented on by WOCCU during the consultation process as follows:

  • final revisions to the credit valuation adjustment risk framework, which will be published in the coming weeks; and
  • a technical amendment on the prudential treatment of non-performing loan securitisations, which will be published for consultation next week.

Members also took stock of banks' progress on benchmark rate reforms and discussed potential regulatory implications stemming from banks' transition to alternative reference rates. The Committee places high priority on this issue and expects all banks to be adequately prepared to meet the transition timeline. 

The Committee also reviewed the responses received to its discussion paper on the prudential treatment for crypto-assets and approved a workplan for the next phase of the work, with a view to future consultation.

A copy of the press release can be viewed here.

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Basel

WOCCU Comments on IASB’s Classification of Liabilities as Current or Non-current

WOCCU responded to the International Standards Accounting Board’s (IASB) requested comments on their Exposure Draft Classification of Liabilities as Current or Non-current—Deferral of Effective Date Proposed amendment to IAS 1. In January 2020, due to Covid-19 pandemic interferences, the IASB proposed a deferral to the amendments for IAS 1 Presentation of Financial Statements, moving the annual reporting periods to the beginning or after January 1, 2023. WOCCU expressed its concurrence with the deferral, expressing the necessary operational relief the deferral would provide to credit unions suffering from pandemic pressures, “that could delay the implementation of any changes in classification resulting from the application of these amendments and… the pandemic will delay the ability of a credit union to start and extend the duration of the renegotiation of loan covenants.” WOCCU’s full response to the IASB’s Exposure Draft can be found here.

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International Accounting Standards Board

FSI Brief Outlines Implications of COVID-19 Payment Holidays

The Financial Stability Institute of the Bank for International Settlements issued its report on payment holidays in the age of Covid: implications for loan valuations, market trust and financial stability. Highlights of the report are as follows: 
  • Governments and banks have introduced payment deferral programmes to support borrowers affected by Covid-19. But deferred payments are not forgiven and must be repaid in the future, raising prospective risks to the banking system. Thus, they should be designed to balance near-term economic relief benefits with longer-term financial stability considerations.
  • The Basel Committee on Banking Supervision (BCBS) and several prudential authorities have issued statements clarifying how payment deferrals should be considered in assessing credit risk under applicable accounting frameworks. These measures aim to encourage banks to continue lending, to avert an even deeper recession.
  • Prudential authorities are caught "between a rock and a hard place" as they encourage banks - through various relief measures - to provide credit to solvent, but cash-strapped borrowers, while keeping in mind the longer-term implications of these measures for the health of banks and national banking systems.
  • In navigating these tensions, banks and supervisors face a daunting task as borrowers that may be granted payment holidays have varying risk profiles. Distinguishing between illiquid and insolvent borrowers - amidst an uncertain outlook - should help guide banks' efforts to support viable borrowers, while preserving the integrity of their reported financial metrics.
A copy of the report can be viewed here.
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Bank of International Settlements

BIS Issues Report on Central Bank's COVID-19 Responses

The Bank of International Settlements (BIS) Issued a report on the central banks' response to the COVID-19 in advanced economies.

Key takeaways from the report area as follows:

  • Central banks in advanced economies reacted swiftly and forcefully to the Covid-19 pandemic, deploying the full range of crisis tools within weeks. The initial response focused primarily on easing financial stress and ensuring a smooth flow of credit to the private non-financial sector;
  • The pandemic triggered complementary responses from monetary and fiscal authorities. Fiscal backstops and loan guarantees supported central bank actions. Asset purchases, designed to achieve central banks’ objectives, helped contain the costs of fiscal expansions; and
  • The footprint of central banks’ measures will be sizeable. Across the five largest advanced economies, balance sheets are projected to grow on average by 15–23% of GDP before end2020 and to remain large in the near future.
A copy of the report can be viewed here.

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Bank of International Settlements

FAQs added to Basel Framework

The Basel Committee on Banking Supervision added to a number of Frequently Asked Questions (FAQs) to the Basel Framework to help answer  various common questions. The questions cover a range of issues including the reform of benchmark reference rates, liquidity, and clarifications relating to the standardized approach to operational risk. 

A copy of the FAQs can be viewed here.

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Basel

WOCCU, ENCU Call for COVID-19 Regulatory Relief

World Council of Credit Unions (World Council), the European Network of Credit Unions (ENCU), and the European Union Credit Union Parliamentary Interest Group (EUCUPIG) in two separate letters called for regulatory relief to allow credit unions in the European Union to play a critical role in the response to the COVID-19 pandemic. Credit Unions have a history of providing critical services through disasters, emergencies and other disruptions by providing direct assistance to their members. 

With proper regulatory relief, credit unions have the ability to advance financial inclusion during the pandemic.   These community-based cooperatives provide services to households, SMEs and vulnerable groups that face a number of obstacles in accessing credit, particularly during this crisis.

This call for regulatory relief came in a series of letters with the ENCU letter signed by five Members of the European Parliament (MEPs) also members of the EUCUPIG::

  • MEP Billy Kelleher (Co-Chair of EPCUIG - Ireland)
  • MEP Paul Tang (Vice-Chair of EPCUIG – The Netherlands)
  • MEP Frances Fitzgerald (Ireland)
  • MEP Barry Andrews (Ireland)
  • MEP Caroline Nagtegaal (The Netherlands)
A copy of the WOCCU letter can be viewed here and a sample ENCU letter here.
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ENCU

WOCCU Urges IASB to Implement Reg Relief in IRB Reform

The World Council of Credit Unions (WOCCU) urged the International Accounting Standards Board (IASB) to adopt measures that would reduce regulatory burden on credit unions in its comment letter on the IASB's Exposure Draft on Interest Rate Benchmark Reform. 

The Exposure Draft is part of the IASB's Interest Rate Benchmark Reform, which was issued in September 2019, and is the next phase of the project that considers the effects of interest rate benchmark reform on an entity’s financial statements that arise when interest rate benchmarks are replaced with alternative, nearly risk-free interest rates that are based, to a greater extent, on transaction data (alternative benchmark rates). 

WOCCU urged the use of the practical expedient in numerous instances to reduce the regulatory burden on the preparation of financial statements.  

A copy of the comment letter can be viewed here.

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International Accounting Standards Board

Credit Union COVID-19 Advocacy Guide Released

In order to assist credit unions worldwide with advocacy with their national level regulators, WOCCU is pleased to make available its Advocacy Insights: Advancing the Credit Union Cause During a Global Pandemic. This guide is designed to give some practical steps to help credit unions demonstrate why policymakers should allow credit unions to be a part of the solution in addressing worldwide problems arising as a result of the COVID-19 pandemic. The credit union cooperative model has demonstrated over and over again their ability to help its members traverse numerous disasters over the years.

A copy of the guide is available here.
Additionally, the guide is available in Spanish here.

FSI focuses on Financial Crimes for COVID-19

The Financial Stability Institute of the Bank for International Settlements issued FSI Brief No. 7 that focuses on Financial Crimes in times of COVID-19 and the corresponding issues of AML and cyber resilience measures.  The key findings of the brief are as follows:  
  • Criminals are exploiting vulnerabilities opened up by the Covid-19 lockdown, increasing the risks of cyber attacks, money laundering (ML) and terrorist financing (TF).
  • Authorities worldwide have responded by drawing financial institutions' attention to these threats and by providing guidance on ways to improve cyber security and mitigate ML and TF risks.
  • Financial authorities are warning financial institutions to be particularly watchful in relation to their IT networks and non-public data; third-party risk; and cyber security incident response plans; and to focus additional effort on staff training and awareness.
  •  Financial authorities also emphasise the need for financial institutions to be vigilant of new ML and TF risks and to continue meeting anti-money laundering (AML) and combating the financing of terrorism (CFT) requirements, while using the flexibility built into the AML/CFT risk-based framework, digital customer on-boarding and simplified due diligence processes.
  • In both areas, the official guidance underscores the trade-offs between expecting financial institutions to enhance or adjust their cyber resilience and AML frameworks and, on the other hand, avoiding imposing an excessive burden that could hinder financial institutions in delivering key financial services.
A copy of the brief can be viewed here.
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Bank of International Settlements

FATF Issues Guidance on COVID-19 AML/CFT Risks

The Financial Action Task Force (FATF) issued a paper identifying challenges, best practices, and policy responses to the unprecedented global challenges emerging as a result of the COVID-19 pandemic.  Increased COVID-19 related crimes, including fraud, cybercrime, misdirection or exploitation of government funds or international financial assistance are all creating new avenues of illicit crimes. 

Emerging risks and vulnerabilities are identified in the paper that could result in criminals finding ways to:  

  • Bypass customer due diligence measures;
  • Increase misuse of online financial services and virtual assets to move and conceal illicit funds;
  • Exploit economic stimulus measures and insolvency schemes as a means for natural and legal persons to conceal and launder illicit proceeds;
  • Increase use of the unregulated financial sector, creating additional opportunities for criminals to launder illicit funds;
  • Misuse and misappropriation of domestic and international financial aid and emergency funding;
  • Exploit COVID-19 and the associated economic downturn to move into new cash-intensive and high-liquidity lines of business in developing countries.
FATF also conducted its first webinar on this topic that can be viewed here. A copy of the paper can be viewed here.
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FATF

European Commission Releases Money Laundering & Terrorist Financing Action Plan

On May 7, 2020, a “ Communication From the Commission on an Action Plan for a comprehensive Union policy on preventing money laundering and terrorist financing” was published in conjunction with the launch of their public consultation requesting feedback on the actions proposed by the Commission to achieve a comprehensive Union policy on preventing money laundering and terrorist financing, and the best way to implement these actions. The Commission’s Action Plan stresses their commitment to combatting both EU and global money laundering and terrorist financing (ML/TF) issues, and the increased instances of criminal activity stemming for the Covid-19 pandemic. The Commission hopes to create a stronger AML/CFT framework and an integrated EU AML/CFT system; and  “intends to implement a comprehensive AML/CFT policy, adapted to the specific threats, risks and vulnerabilities currently facing the EU14 and designed in a manner that can evolve efficiently while taking into account innovation.”

The Action Plan outlines how the Commission plans to carry out their objectives by building on the following six pillars:

  • Ensuring the effective implementation of the existing EU AML/CFT framework;
  • Establishing an EU single rule book on AML/CFT;
  • Bringing about EU level AML/CFT supervision;
  • Establishing a support and cooperation mechanism for FIUs;
  • Enforcing Union-level criminal law provisions and information exchange;
  • Strengthening the international dimension of the EU AML/CFT framework.

WOCCU looks forward to responding to the Commission’s consultation and supporting the consideration of credit unions in the formulation and implementation of their action items addressing ML/TF prevention.

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European Commission

Basel Committee Releases Survey Regarding Climate Related Financial Risk Initiatives

The Basel Committee published their, “Climate-related financial risks: a survey on current initiatives”, summarizing members’ existing regulatory and supervisory initiatives on climate-related financial risk. The Basel Committee created the Task Force on Climate-related Financial Risks (TFCR) to improve global financial stability by performing “a stocktake of members’ existing regulatory and supervisory initiatives on climate-related financial risks;” initiating “a set of analytical reports on climate-related financial risks, including a literature review, and reports on the transmission channels of such risks to the banking system as well as on measurement methodologies”; and developing “effective supervisory practices in order to mitigate climate-related financial risks”.

The survey suggests that:

  • The majority of Basel Committee members consider it appropriate to address climate-related financial risks within their existing regulatory and supervisory frameworks;
  • an overwhelmingly large share of members have conducted research related to the measurement of climate-related financial risks, while a number of members identified operational challenges in assessing climate-related financial risks such as data availability, methodological challenges, and difficulties in mapping of transmission channels. A majority of the members have raised risk awareness with banks through different channels, and many banks are disclosing information related to climate-related financial risks to some extent; and
  • approximately two-fifths of members have issued, or are in process of issuing, more principles based guidance regarding climate-related financial risks. However, the majority of members have not factored, or have not yet considered factoring, the mitigation of such risks into the prudential capital framework.
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Basel

5th FSI COVID-19 Brief Issued on Government Guarantee Programs

The Financial Stability Institute of the Bank for International Settlements issued its 5th Brief on Public guarantees for bank lending in response to the Covid-19 pandemic.  Highlights of the brief are as follows:
  • In response to the Covid-19 pandemic, governments have launched guarantee programmes to support bank lending to companies, especially small and medium-sized enterprises. This is essential to avoid a sharp contraction in bank credit that would exacerbate the pandemic's adverse impact. 
  • The design of such programmes needs to strike a difficult balance between responding promptly to the pandemic and maintaining a sufficient level of prudence. Key features of a sample of programmes (eg target beneficiaries, coverage of the guarantee, loan terms, length of the programme) reflect this tension.
  • Incentives were created for the banks to join these programmes by exploiting flexibility in existing prudential requirements, while central banks have often provided liquidity support. Programmes are, however, subject to operational challenges and, ultimately, fiscal capacity limits.
A copy of the brief can be viewed here.
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Bank of International Settlements

BIS Publishes Bulletin on Role of Prudential Policy in Covid-19 Losses

The Bank for International Settlements (BIS) published a bulletin entitled “Buffering Covid-19 Losses – the Role of Prudential Policy”, suggesting conditions to address the shock coronavirus pandemic has had on the economy through release of prudential buffers. The bulletin is divided into three parts: 1. Assessment of how banks are and will be affected by Covid-19 confinement measures and policy responses to the pandemic; 2. design and usability of prudential buffers; and 3. relaxing buffers to support banks.

According to BIS the following are key takeaways from the bulletin:

  • “By allowing banks to run down some of their buffers, policymakers are sending a strong signal about their resolve to lessen the economic fallout from the pandemic. Such prudential measures complement the main policy levers: monetary and fiscal instruments. 
  • To avoid a reduction in credit to the real economy, authorities need to ensure that banks have the capacity and willingness to make use of the flexibility afforded by the buffer release. Payout restrictions on banks and risk-sharing between banks and the public sector will be key.
  • For banks to continue playing a positive role in the supply of funding during the recovery, they should maintain usable buffers for a long period, as losses from a severe recession will take time to materialise.”
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Bank of International Settlements

BIS Publishes Working Papers on Post-Crisis International Financial Regulatory Reforms

The Bank for International Settlements published working papers entitled, “Post-crisis international financial regulatory reforms: a primer”, which reviews post-crisis regulatory reforms, specifically reviewing the bank and Central Counterparties (CCP) international regulatory reforms and how CCP international standards fit within a “unified analytical framework”. The CCP reforms were implemented in response to the Great Financial Crisis (GFC) with the purpose of improving financial stability through the implementation of improved and new standards. The BIS working paper is primarily based on a review of the unified analytical framework and premised on the belief that the key concept of the framework is “shock-absorbing capacity, which is higher when (i) there is less exposure to the losses that a shock generates and (ii) there are more resources to absorb such losses.” The working paper argues that a “conservative regulatory approach” is necessary to address issues of political pressures on the economy and technical obstacles to reform, and “[a] higher cost of balance sheet space is a healthy side effect of the backstops underpinning such an approach". BIS’ summary of this working paper can be found here.

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Bank of International Settlements

4th FSI COVID-19 Brief issued with Focus on Insurance

The Financial Stability Institute of the Bank for International Settlements issued its 4th Brief on Insurance Regulatory Measures in Response to COVID-19.  The highlights of the brief are as follows: 
  • Currently, insurers are more likely to experience losses from financial market volatility than from higher insurance claims arising from Covid-19. Few insurance supervisors have seen a need to strengthen or adjust prudential requirements to insulate insurers from current financial market uncertainties.
  • So far, authorities have responded mainly by taking measures to provide operational relief to insurers from regulatory and supervisory requirements so that they can continue providing insurance services. These measures will also help insurers to enhance risk monitoring of their Covid-19 financial exposures.
  • Some authorities have set out expectations for insurers to conserve capital through prudent exercise of dividend and variable remuneration policies. The aim is to enhance their resilience against huge uncertainties from potential Covid-19 fallout. Other capital-related measures should relieve supervisory pressures and reduce the tendency of insurers to manage their investments in a procyclical manner. These measures include: extending the supervisory intervention ladder, triggering the countercyclical lever and recalibrating capital requirements.
  • The far-reaching impact of Covid-19 calls for sustained vigilance by both supervisors and insurers. In the post-pandemic phase, the extraordinary measures currently warranted will need to be unwound through a carefully crafted exit strategy that preserves sound risk management practices and protects policyholders' interests.
A copy of the brief can be viewed here.
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Bank of International Settlements