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Basel III Not Viewed as a "Burden" by Basel Committee

"I don't see Basel III as a burden - I see a compelling case to get it done" said Carolyn Rogers, Secretary General of the Basel Committee on Banking Supervision in the ECB Supervision Newsletter.  This quote came as a part of her comments responding to the question of whether the implementation of Basel III reforms in the aftermath of the pandemic was creating an extra burden on banks (and financial institutions). 

Rogers noted that a healthy, well-capitalised banking system can support an economy, even under severe stress. This is in contrast to what was learned during the great financial crisis, which was that weak banks not only create a financial crisis but they can also amplify the effects of that crisis on the real economy. 

WOCCU's concern with the statement, however, continues to be the indifference by the Basel Committee to smaller, less complex, community based financial institutions such as credit unions where clearly the Basel III reforms have increased complexity, regulatory burden, and in some instances the ability to serve rural or underserved markets.  

A complete copy of the interview can be viewed here.



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Basel

World Council Calls for Pandexit Flexibility from Basel Committee

The World Council of Credit Unions called for flexibility from the Basel Committee on Banking Supervision as the Committt considers the withdrawal of relief measures adopted during the COVID-19 pandemic. “It is important to allow national level regulators a great amount of flexibility to adjust to local conditions and economies when removing COVID-19 relief measures for credit unions.  Otherwise unnecessary shocks to their balance sheets could hinder their ability to serve communities trying to recover from the pandemic,” said WOCCU Sr. VP of Advocacy and General Counsel, Andrew Price.

In particular WOCCU urged the following actions by the Basel Committee that will benefit credit unions and set the framework for a measured and orderly withdrawal of relief measures:

  1. Provide clear direction to national-level supervisors that a measured and orderly withdrawal is appropriate, without establishing any firm timelines or deadlines.
  2. Allow national-level supervisors with ample discretion to adjust the withdrawal of relief based on local conditions and localized circumstances.
  3. Provide direction to national-level supervisors urging patience and leniency erring on the side of leaving a relief measure in place versus the risk of harm that may result from an early withdrawal of a relief measure.
  4. Allow supervisors to work with financial institutions on reasonable capital restoration plans that are appropriate for each institution while holding them harmless from any regulatory violation so long as the plan is being executed in good faith and absent any safety and soundness concern.

Additionally, World Council, in conjunction with FEDEAC, has issued “Financial Strategy to Mitigate the Impact of the COVID-19 Crisis COVID-19 Global Response Committee Technical Paper”[1]; which provides additional insight into the specific areas of concern for credit unions during the COVID-19 recovery period. This is a beneficial tool that credit unions utilize that is comprised of recommendations for strategic methods to manage the impact of the social and economic crisis generated by the COVID-19 pandemic

A full copy of World Council's letter can be viewed here.

 

[1] See, https://www.woccu.org/newsroom/covid19_resources?post_id=2156#2156.

 

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Basel

Basel Committee and World Bank Publish Survey on Proportionality

On July 30, 2021, the Basel Committee on Banking Supervision and the World Bank published a global survey of 90 authorities including bank supervisors and regulators entitled, Proportionality in bank regulation and supervision - a joint global survey. Although the Basel Committee acknowledges that proportionality encourages many benefits such as banking stability, reduction of compliance costs and regulatory burden, and utilization of “scarce supervisory resources”,  the Committee recognizes challenges related to the approach and implementation of proportionality such as “how to define the tiering criteria, how to maintain a level playing field and how to avoid opportunities for regulatory arbitrage” and “how to ensure financial positions are still comparable across banks and how to achieve net reduction in compliance costs and stress on supervisory resources and constraints.”

The Basel Committee touts that proportionality is ingrained in their work, specifically in the Committee’s Core Principles for Effective Banking Supervision (BCPs). World Council fully supports the Basel Committee and World Bank’s commitment to improving proportionality approaches, however, the related concerns and concepts within proportionality should apply widely to all relevant financial institutions such as credit unions and not just to banks. “We applaud the Basel Committee’s focus on understanding proportionality. However, we note the absence of responses that indicate a connection between proportionality and financial inclusion and providing access to responsible financial products. This should also be a significant driver for implementing proportionality by all supervisory authorities beyond the focus on supervisory resources”, says World Council Sr. Vice President of Advocacy, Andrew Price. 

“The key takeaways from the analysis of survey responses are:

  • Proportionate implementation is practised widely, across geographic regions and income groups. The use of proportionality is growing, as judged by respondents reporting future plans for proportionality. This is a work-in-progress but is also challenging for several jurisdictions.
  • Importantly, proportionality is acknowledged by respondents as promoting banking stability, reducing unnecessary regulatory burden and compliance costs, and making effective use of scarce supervisory resources. Consistent with this, a significant proportion of respondents (67%) are planning to implement or revise their proportionate approaches. Respondents have also expressed a clear preference for implementing a limited set of Committee standards.
  • However, challenges remain for jurisdictions that have adopted or are considering adopting proportionality. These challenges are during the design of proportionate approach (eg how to define the tiering criteria, how to maintain a level playing field and how to avoid opportunities for regulatory arbitrage) and after proportionality is implemented (eg how to ensure financial positions are still comparable across banks and how to achieve net reduction in compliance costs and stress on supervisory resources and constraints).
  • Implementation is motivated by factors other than risk profile or systemic relevance in some cases. For example, full or conservative set are implemented by jurisdictions seeking to obtain or retain correspondent banking relationships, meet the expectation of host jurisdiction supervisors or of rating agencies, regional pressure and peer pressure.”

More information on the survey can be found here.

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Basel

European Commission Presents AML/CFT Overhaul

On July 20, 2021, the European Commission presented a legislative proposal package to enhance anti-money laundering and countering terrorism financing rules, and create a new EU AML Authority (AMLA) to combat money laundering. The Commission’s goal is to make improvements to the existing EU framework by bettering methods to detect suspicious transactions and activities and address loopholes that criminals use to launder illicit proceeds or finance terrorist activities. The package includes four legislative proposals:

More information on the Commission’s package of legislative proposals is available here.

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European Commission

Climate-Related Financial Risk Letter from FSB Chair to G20

In anticipation of a July 9th meeting, a letter from Financial Stability Board (FSB) Chair, Randal K. Quarles to G20 Finance Ministers and Central Bank Governors, was published highlighting remaining risks to financial stability associated with non-bank financial intermediation and money market funds, climate change, and transition away from LIBOR as prominent issues. Notably, the FSB Chair underlined the need for coordinated efforts to address financial risks related to climate change and requested endorsement from the G20 of a roadmap tasked with undertaking climate-related financial risks. “The roadmap outlines the work underway and still to be done by standard-setting bodies and other international organizations over a multi-year period in four key policy areas: disclosures, data, vulnerabilities analysis, and regulatory and supervisory approaches.”

On July 7, 2021, the FSB published three climate-related reports:

More information is available on the FSB Chair’s letter to the G20 and Central Bank Governors here.

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Financial Stability Board

Basel Releases Report on Impact of Basel Reforms in Light of Pandemic

On July 7, 2021, the Basel Committee on Banking Supervision released its interim report,  Early lessons from the Covid-19 pandemic on the Basel reforms, as part of “the Committee's broader work programme to evaluate its post-global financial crisis reforms”.  The report supports the argument that regulatory reforms in response to the financial crisis have “absorbed the shock” brought about by the COVID-19 pandemic. The report essentially touts the success of the Basel III reforms maintaining that without them and other support measures by public authorities, the banking system would have suffered from greater stress.

  • “New report gives a preliminary assessment of the impact of implemented Basel reforms during the pandemic as part of a broader evaluation of their effectiveness.
  • Higher quality capital and liquidity levels required by the reforms helped banks absorb the significant impact of Covid-19 shock.
  • The banking system would have faced greater stress during this period had the reforms not been adopted and implemented.”

More information on the Basel Committee’s report is available here.

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Basel

Financial Stability Board Emphasizes Urgency to Transition from LIBOR

Today the Financial Stability Board (FSB) published a progress report to the G20 on LIBOR transition and remaining issues, highlighting the FSB’s priority to transition away from LIBOR, and underscoring that a majority of LIBOR settings will cease in less than half a year. “The FSB encourages authorities to set globally consistent expectations and milestones that firms will rapidly cease the new use of LIBOR, regardless of where those trades are booked or in which currency they are denominated. Market participants are urged to cease new use of LIBOR in all currencies as soon as practicable, respecting national working group timelines and supervisory guidance where applicable, and in any case no later than the end of 2021.”

FSB further urged market participants to complete steps laid out in the Global Transition Roadmap, and for supervisory authorities to increase efforts to communicate the scope and urgency of LIBOR transitions to all clients. The FSB has committed themselves to helping with the transition of those emerging markets and developing economies that are lagging behind.

More information on the FSB’s report to the G20 and general efforts to transition away from LIBOR are available here.  

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Financial Stability Board

Bank for International Settlements Releases Annual Economic Report

On June 29, 2021, the Bank for International Settlements (BIS) released its  Annual Economic Report at the Annual General Meeting. The report includes several topics including:

  • Pandexit: how “recovery will be uneven and the long-term consequences material”.
  • Challenges as a result of COVID-19 pandemic including but not limited to: upside and downside risks; diverging economic conditions and tensions between fiscal and monetary policy; lack of policy support in emerging market economies (EMEs).
  • The distributional footprint of monetary policy: how to combat economic inequity, which BIS argues are “outside the reach of monetary policy, and is best addressed by fiscal and structural policies.”
  • Central bank digital currencies (CBDCs): an opportunity for the monetary system.

More information on the BIS’ Annual Economic Report is available here.

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Bank of International Settlements

FATF Releases Report on Opportunities and Challenges of New Technologies for AML/CFT

The Financial Action Task Force (FATF) released a report entitled, Opportunities and Challenges of New Technologies for AML/CFT, identifying emerging and available technology-based solutions. The purpose of the report, “highlights the necessary conditions, policies and practices that need to be in place to successfully use these technologies to improve the efficiency and effectiveness of AML/CFT”, as well as roadblocks to implementation of new technology including “innovative skills, methods, and processes that are used to achieve goals relating to the effective implementation of AMLCFT requirements or innovative ways to use established technology-based processes to comply with AML/CFT obligation.” World Council applauds FATF’s incorporation of financial inclusion into the report, and their acknowledgment that financial inclusion can mitigate AML/CFT risks.

“FATF has reiterated its commitment to the proportionate risk-based adoption of its Standards with a view to protecting the most vulnerable and supporting the reach of AML/CFT safeguards. Its publication of FATF Guidance on AML/CFT measures and financial inclusion, with a supplement on customer due diligence sought to raise awareness of the issue as well as “encourage countries to make use of the FATF Recommendations’ flexibility to provide sound financial services to the financially excluded. (Vyjayanti T Desai et al., 2018[7])”

World Council has previously commented on the unintended risks associated with FATF standards such as the effects of overburdensome regulation and its impact on financial inclusion. World Council will continue to advocate for proportional regulation that will foster financial inclusion by providing right-sized regulation for credit unions, which are essential to the financial inclusion of underserved communities.

More information on the Opportunities and Challenges of New Technologies for AML/CFT is available here.

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FATF

Bank of Italy Governor Speaks on Financial Inclusion in Closing Address to 2021 IIF G20 Conference

On June 17, 2021, Ignazio Visco, the Governor of the Bank of Italy gave a keynote address to the 2021 IIF G20 Conference- The G20 Agenda Under the Italian Presidency. In his address, Mr. Visco covered topics regarding COVID-19 and the global economy, financial regulation, and financial inclusion and international digital cooperation.

Visco highlighted that the concerns that existed before the pandemic are more pronounced today, such as the increased use of digitalization. He noted that in coordination with major international organizations, the G20 Finance Ministers and Central Bank Governors updated their Action Plan to continue to continue the effectiveness of economic policy responses and conceded the“…need to closely monitor the increasingly divergent recovery paths – which may well entail an asynchronous unwinding of monetary and fiscal support measures – and take international policy spillovers into account.”

The Governor also emphasized the need to address vulnerabilities in the non-bank financial intermediation (NBFI) sector, especially in the areas of Money Market Funds. Visco also discussed financial regulation concerns surrounding mitigation of climate-related financial risks. “The G20 Finance Track aims to encourage a better alignment of both public and private financial commitments with the objectives of the 2015 Paris Agreement.”

Most notably, Visco addressed how digitalization has a direct impact on financial inclusion. He warned that while digitalization may build access, it could also “lead to new forms of exclusion” including indebtedness. “The outcome will depend, crucially, on the development and accessibility of digital infrastructures, the degree of financial and digital literacy, and the adequacy of governance, especially in the fields of regulation and supervision.” Some of the solutions Visco prescribed include: fostering more innovative regulatory and supervisory approaches; development of cross-border payments to make them cheaper, faster, more transparent and inclusive; and coordination with the Financial Stability Boards’ recommendations to address challenges related to global stablecoins for regulation, supervision, and payment-system oversight.

Governor Ignazio Visco’s full speech is available here.

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Bank of International Settlements, G20

Basel Committee Meets to Discuss Covid-19 Impact on Banks

On June 4, 2021, the Basel Committee on Banking Supervision met to cover the following issues related to the effect of Covid-19 on the current banking system:

  • Discussion on “Covid-19 risks to banking system, reviews provisioning practices and stresses importance of using capital and liquidity buffers.
  • Review of interim report evaluating impact of Basel framework during Covid-19.”
  • Agreement “to hold public consultation on prudential treatment of cryptoasset exposures.”

While the world is beginning to re-open, the Committee cautioned that banks and supervisors should still remain watchful for Covid-19 risks and vulnerabilities by using, among other things, “Basel III capital and liquidity buffers to absorb shocks and maintain lending to creditworthy households and businesses”, and strengthening operational resilience. The committee also evaluated post-crisis reforms by reviewing an interim report, which gave a preliminary assessment of the impact that Basel III standards had during the pandemic. Cryptoassets market developments were also covered during the meeting, as well as “next steps in developing its prudential treatment for banks' cryptoasset exposures.”

More information on the June 4th Basel Committee meeting is available here.

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Basel

Financial Stability Board Supports End of LIBOR by End of 2021

LIBOR is coming to an end. While many USD settings will continue until the end of 2023, the majority of LIBOR panel of global banks will cease by the end of 2021. In March, the ICE Benchmark Administration (IBA) and the Financial Conduct Authority (FCA) made confirmation of the dates that all LIBOR settings will discontinue. In response, the Financial Stability Board (FSB) has published several reports and publications supporting a “smooth transition” away from LIBOR by the end of 2021.

The FSB made recommendations for financial, non-financial sector firms, and authorities to consider by publishing the following statements and reports:

  • “An updated global transition roadmap that, drawing on national working group recommendations, summarises the high-level steps firms will need to take now and over the course of 2021 to complete their transition.
  • A paper reviewing overnight risk-free rates and term rates, building on the concept that the tools necessary to complete the transition are currently available. The FSB cautions market participants against waiting for the development of additional tools, in particular forward-looking term risk-free rates.
  • A statement on the use of the ISDA spread adjustments in cash products, to support transition particularly in loan markets, which remains an area of concern with much new lending still linked to LIBOR.
  • statement encouraging authorities to set globally consistent expectations that regulated entities should cease the new use of LIBOR in line with the relevant timelines for that currency, regardless of where those trades are booked.”

Additional information on the FSBs recommendations for LIBOR transition is available here.

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Financial Stability Board

Bank for International Settlements Releases Executive Summary on Cyber Resilience Practices

The Bank for International Settlements (BIS) published their Cyber resilience practices – Executive Summary, with the aim of strengthening cyber resilience within financial firms. Citing the Financial Stability Board’s (FSB) definition, cyber resilience consists of "the ability of an organisation to continue to carry out its mission by anticipating and adapting to cyber threats and other relevant changes in the environment and by withstanding, containing and rapidly recovering from cyber incidents."  

The Executive Summary covers the following topics:

  • Regulation and supervision
  • Cyber incident response and recovery
  • Third party discrepancies
  • Information-sharing arrangements
  • Cyber resilience metrics

Additional information on the Executive Summary is available here.

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Bank of International Settlements

Network for Greening the Financial System Works to Meet 2015 Paris Agreement Goals

In an effort to meet goals for the 2015 Paris Agreement, The Network for Greening the Financial System (NGFS) released a summary of their May 2020, Guide for Supervisors – Integrating climate-related and environmental risks into prudential supervision. The Climate and environmental risks - guide for supervisors - Executive Summary, summarizes the five key recommendations to “provide authorities with a roadmap to integrate climate-related and environmental risks in supervisory frameworks”.

The recommendations include:

Image via: Bank for International Settlements website: https://www.bis.org/fsi/fsisummaries/climate_env_risks.htm


A detailed summary of each recommendation is available here.

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Bank of International Settlements

Financial Stability Board Requests Response to Public Consultation on Cross-Border Payments

On May 31, 2021, the Financial Stability Board (FSB) announced they were seeking response to their public consultation, Targets for Addressing the Four Challenges of Cross-Border Payments. The global targets proposed are intended to improve cost, speed, transparency and access to cross-border payments via the FSB’s Roadmap for Enhancing Cross-border Payments. “The quantitative targets proposed are a foundational step in the G20 Roadmap for Enhancing Cross-border Payments, which was endorsed by G20 Leaders in November 2020."

The FSB expects individual targets to be met by end of 2027, however, remittance cost targets are set for 2030 by the United Nations Sustainable Development Group Goal (UN SDG), which is endorsed by the G20.

The FSB anticipates that a final report consisting of final targets will be completed by October of this year. By this date the FSB states they will have developed an “implementation approach for monitoring the targets that will set out:

  1. how targets will be measured and data sources and data gaps to be filled;
  2. how progress towards meeting the targets will be monitored; and
  3. the frequency of data collection and publication.”

More information on the FSB public consultation on cross-border payments can be found here and here.

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Financial Stability Board

Financial Stability Institute Issues Paper on Supervising Cryptoassets

The Financial Stability Institute issued its insights on supervising cryptoassets for anti-money laundering.  The paper noted that although certain cryptoassets have the potential to make payments and transfers more efficient, some of their features may heighten money laundering/terrorist financing (ML/TF) risks. In particular, the speed of transactions, global reach, potential for anonymous activity and the potential for transactions to take place without financial intermediaries make cryptoassets vulnerable to misuse. In fact, the scale of illicit use of cryptoassets is already significant, highlighting the importance of AML/CFT regulation and supervision, as well as law enforcement, in this area.

The paper discusses emerging regulatory approaches and supervisory practices and identifies policy priorities to address common challenges faced by regulatory authorities.  It also notes the efforts of hte Financial Action Task Force in this area to prevent the misuse of cryptoassts for ML/TF.

A copy of the paper can be viewed here.

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Basel

Financial Conduct Authority Develops Consumer Duty to Increase Level of Consumer Protection

The Financial Conduct Authority (FCA) is currently establishing plans for a new Consumer Duty to bolster their existing rules and principles in order to enhance consumer protection in retail financial markets. In the FCA’s 2020 Financial Lives survey, 1 in 4 respondents said they “lack confidence in the financial services industry and only 35% of respondents agreed that firms are honest and transparent in their dealings with them.” The Consumer Duty will be a requirement for firms to adhere to and is subject to regulatory enforcement for non-compliance. Its three key elements include:

  1. “The Consumer Principle, which will reflect the overall standards of behaviour the FCA expects from firms. The wording being consulted on is: 'a firm must act in the best interests of retail clients' or 'a firm must act to deliver good outcomes for retail clients'.
  2. Cross-cutting rules which would require 3 key behaviours from firms, which include taking all reasonable steps to avoid foreseeable harm to customers, taking all reasonable steps to enable customers to pursue their financial objectives and to act in good faith.
  3. It will also be underpinned by a suite of rules and guidance that set more detailed expectations for firm conduct in relation to 4 specific outcomes – communications, products and services, customer service and price and value.”

More information on the FCA’s Consumer Duty is available here.

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Financial Conduct Authority

Basel Committee 2021-22 Work Programme and Strategic Priorities Released

On April 16, 2021, the Basel Committee on Bank Supervision published it’s 2021-22 work programme outlining the Committee’s strategic priorities and “reflects the outcome of a recent strategic review by the Committee to ensure that it continues to effectively promote global financial stability and strengthen the regulation, supervision and risk management practices of banks worldwide.” The key themes of the work programme cover Covid-19 resilience and recovery; horizon scanning, analysis of structural trends and mitigation of risks; and strengthening supervisory coordination and practices. The Committee’s oversight body, Group of Governors and Heads of Supervision (GHOS), will be focusing on these themes in the following ways:

  • Covid-19 resilience and recovery: Ongoing monitoring and assessment of risks and vulnerabilities to the global banking system; and additional policy and/or supervisory measures to mitigate these risks where relevant.
  • Horizon scanning and mitigation of medium-term risks and trends: Identifying, assessing and mitigating medium-term risks and structural trends to the banking system, including efforts towards the digitalisation of finance, climate-related financial risks, and the impact on banks' business models resulting from a "low-for-long" interest rate environment.
  • Strengthening supervisory coordination and practices: Pursue “initiatives aimed at strengthening supervisory coordination and practices, with a focus on the role of artificial intelligence / machine learning in banking and supervision, data and technology governance by banks, operational resilience, and the role of proportionality in bank regulation and supervision.”

More information on the Basel Committee’s 2021-22 work programme can be viewed here.

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Basel

Basel Committee Releases Two Reports on Climate-Related Financial Risks

On April 14, 2021, the Basel Committee on Banking Supervision published two reports on climate-related financial risks entitled,  Climate-related risk drivers and their transmission channels and Climate-related financial risks – measurement methodologies. According to the Bank for International Settlements’ press release:

  • The two reports discuss transmission channels of climate-related risks to the banking system, and the measurement methodologies of climate-related financial risks.
  • Climate risk drivers can be captured in traditional financial risk categories, but additional progress is needed to better estimate these risks.
  • The reports provide a conceptual foundation for the Basel Committee's next phase of work to identify potential gaps in the Basel Framework and consider measures to address them.

The report on Climate-related risk drivers and their transmission channels, discusses how climate-related risks come to fruition and how they affect banks and the banking system as a whole, while the report on Climate-related financial risks – measurement methodologies, covers “conceptual issues” surrounding climate-related financial risk measurements, as well as related bank and supervisory practices. There is still a way to go to identify and improve on risk mitigation and the Basel Committee is currently working on how to incorporate climate-related financial risk into their Basel Framework. “While a range of methodologies is currently in use or being developed, challenges remain in the estimation process, including data gaps and uncertainty associated with the long-term nature and unpredictability of climate change.” 

More information on the Basel Committee’s climate-related financial risk reports can be viewed here.

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Basel

Financial Stability Board Addresses G20 Regarding Covid-19, Too-Big-To-Fail and Climate Change

In anticipation of the April 7th meeting with the G20, on April 6, 2021, the Financial Stability Board (FSB) published a letter from Chair, Randall K. Charles entitled, To G20 Finance Ministers and Central Bank Governors. The letter discusses Covid-19 support ramifications, FSB's support of the progress made on Too-Big-To-Fail (TBTF) reforms for banks, and emphasizes the importance of focusing on climate change issues as they relate to financial services.

The letter includes mention of the report the FSB and delivered to the G20 on April 6, entitled, COVID-19 support measures Extending, amending and ending. Notably, the report states that “withdrawal of support measures before the macroeconomic outlook has stabilised could be associated with significant immediate risks to financial stability.” The FSB, however, maintains that support measures could exist past the point of being helpful and that financial stability risks will start to grow; but admittedly, the FSB acknowledges that “most authorities currently believe that the costs of premature withdrawal of support could be more significant than maintaining support for too long”, and that flexibility and a “state-contingent approach” could minimize risks.

The letter goes on to endorse TBTF reforms but highlights vulnerabilities within non-bank financial intermediation or NBFI (insurance firms, venture capitalists, currency exchanges, some microloan organizations, and pawn shops); and lastly, discusses sustainable finance and climate change issues. FSB deliverables to the G20 (due in July) include two reports “on ways to promote consistent, high-quality climate disclosures in line with the recommendations of the Task Force for Climate-related Financial Disclosures; and on the data necessary for the assessment of financial stability risks and related data gaps.” The FSB will also present a roadmap to the G20 on climate-related financial risk, and coordinate with the G20 in developing their sustainable finance roadmap.

More information on the FSB’s letter, To G20 Finance Ministers and Central Bank Govenors; and report on COVID-19 Support Measures Extending, Amending an Ending, can be viewed here.

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Financial Stability Board

Basel Oversight Group Discuss Global initiatives on Non-Bank Financial Intermediation

On March 31, 2021, the Basel Committee on Banking Supervision’s oversight body, the Group of Central Bank Governors and Heads of Supervision (GHOS), met to endorse the Basel Committee’s 2021-22 work programme and strategic priorities. The work programme “places high priority on the implementation and evaluation of previously agreed reforms, on assessing emerging risks and vulnerabilities, and increasing supervisory cooperation.” Part of that endorsement included and discussion surrounding global initiatives for non-bank financial intermediation (NBFI).

Regulators are taking notice that NBFI has a substantial impact on the market: banks and non-banks (such as like insurance companies, pension funds, investment funds, etc) are “interconnected through multiple channels”, and non-banks take up nearly half of the “global financial system”. Following the Financial Stability Board’s lead on tackling NBFI initiatives, the GHOS suggest taking a “holistic approach” when addressing areas needed to improve NBFI resilience.

More information on the GHOS meeting can be viewed here.

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Basel

Financial Stability Board Publishes Evaluation of Too Big to Fail Reforms for Systemically Important Banks

On March 31, 2021, the Financial Stability Board (FSB) published its final report entitled, Evaluation of the Effects of Too-Big-To-Fail Reforms, focusing their attention mainly on systemically important banks (SIBs). The objective of the evaluation is to examine “the extent to which the reforms have reduced the systemic and moral hazard risks associated with SIBs, as well as their broader effects on the financial system.”

While the report included mention of non-bank institutions, it largely focused on SIB reforms and how non-bank institutions function in proximity to them, stating that: “As SIBs face more stringent requirements, other banks and non-bank financial institutions would pick up market share and improve profitability relative to SIBs.”

The report goes on to articulate that “other intermediaries” including both banks and non-banks have contributed more than global systemically important banks to growth in the ratio of credit to GDP and hypothesized that “additional impact of the TBTF reforms on G-SIBs could have left space for growth by other intermediaries”; and that non-bank financial intermediation (NBFI) has substantial growth in total assets after the TBTF reforms. However, credit unions typically remain stable during economic hardship with no bearing on whether SIBs perform satisfactorily. The report waivers on its opinion of non-bank institutions and hypothesizes that more diversity within the financial system could support financial stability, but then conjectures that “a shift of credit provision activities to non-bank financial intermediaries could raise financial stability concerns.” Ultimately, the FSB concedes that the implications of non-bank institutions have not been fully evaluated and that they will work to address financial stability risks. World Council agrees and urges the FSB to study the impact of the “Too-Big-To-Fail” reforms on smaller financial institutions.  

FSB voiced the need to improve the resiliency of NBFI, asserting that “the events of March 2020 suggested that some parts of the NBFI system acted as propagators rather than mitigants of the stress.”  What the FSB should consider is that smaller, not-for-profit cooperative institutions such as credit unions, are more stable during times of economic hardship.  This is due to their not-for-profit status and ability to provide necessary services to the underserved community typically forgotten or ignored by SIBs. Credit unions provide a direct benefit to the financial market and should be given some deference as to the needs of these institutions by providing proportional reforms so that they can continue to thrive and contribute to market buoyancy.

More information on the final report can be viewed here and here.

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Financial Stability Board

IASB Extends Application Period of Practical Expedient in IFRS 16 Leases

In response to stakeholders and in light of the continuing Covid-19 pandemic, on March 31, 2021, the International Accounting Standards Board (Board) prolonged aid to lessees accounting for Covid-19-related rent concessions by extending, for one year, the application period of the practical expedient in IFRS 16 Leases.

The amendment was implemented to alleviate lessees accounting of Covid-19 related rent concessions, “such as rent holidays and temporary rent reductions, while continuing to provide useful information about their leases to investors.” The amendment, which was originally issued in May 2021, will now apply to rent concessions reducing lease payments due on or before June 30, 2022.

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International Accounting Standards Board

World Council Advocated Proportionality Included in Basel Operational Resilience Guidance

The Basel Committee on Banking Supervision issued two guidance documents concerning Operational Resilience including the Principles of Operational Resilience and  Revisions to the Principles for the Sound Management of Operational Risk.  Both documents take a principled approach which allows for a risk-based and proportional application to any requirements implemented. 

Specifically, the Principles of Operational Resilience state “By building upon existing guidance and current practices, the Committee is issuing a principles-based approach to operational resilience that will help to ensure proportional implementation across banks of various size, complexity and geographical location.”

Further, the Principles for Sound Management of Operational Risk states “Thus, the review of the Principles is also the opportunity to stress that this model should be adequately and proportionally used by financial institutions to manage every kind of operational risk subcategory, including ICT risk” (emphasis added).

World Council advocated for the inclusion of this emphasis on proportionality in its comment letters to the Basel Committee filed during their consultation period (here and here).  WOCCU applauds the Basel Committee on this principles based and proportional approach which will help increase credit unions’ capacity to withstand disruptions due to severe events, but in a manner commensurate with their size, risk, and complexity.

A copy of the Principles of Operational Resilience can be viewed here; and the Principles for Sound Management of Operational Risk can be viewed here.

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Basel

EU Council Adopts Conclusions on Cybersecurity Strategy

On March 22, 2021, the European Council adopted conclusions on the European cybersecurity strategy in their Draft Council conclusions on the EU’s Cybersecurity Strategy for the Digital Decade, which was presented by the European Commission. The Council’s aim is to create a framework that will: protect citizens and businesses from cyber threats, secure information systems and cyberspace, create strategic autonomy and an open economy, all of which will conceivably establish “a resilient, green and digital Europe.” Further, the Council urges the Commission and the High Representative to institute a detailed implementation plan.

Some of the Council’s action items include:

  • the plans to create a network of security operation centres across the EU to monitor and anticipate signals of attacks on networks
  • the definition of a joint cyber unit which would provide clear focus to the EU's cybersecurity crisis management framework
  • its strong commitment to applying and swiftly completing the implementation of the EU 5G toolbox measures and to continuing efforts made to guarantee the security of 5G networks and the development of future network generations
  • the need for a joint effort to accelerate the uptake of key internet security standards, as they are instrumental to increase the overall level of security and openness of the global internet while increasing the competitiveness of the EU industry
  • the need to support the development of strong encryption as a means of protecting fundamental rights and digital security, while at the same time ensuring the ability of law enforcement and judicial authorities to exercise their powers both online and offline
  • increasing the effectiveness and the efficiency of the cyber diplomacy toolbox giving special attention to preventing and countering cyberattacks with systemic effects that might affect supply chains, critical infrastructure and essential services, democratic institutions and processes and undermine economic security
  • the proposal on the possible establishment of a cyber intelligence working group to strengthen EU INTCEN's dedicated capacity in this domain
  • the importance of strengthening cooperation with international organisations and partner countries in order to advance the shared understanding of the cyber threat landscape
  • the proposal to develop an EU external cyber capacity building agenda to increase cyber resilience and capacities worldwide

More information on the Council's adopted conclusions on cybersecurity can be found here.

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Council of the European Union