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Basel Discusses AI and Machine Learning

The Basel Committee on Banking Supervision (Committee) issued a newsletter discussing its internal discussions regarding artificial intelligence and machine learning.  The newsletter made the following observations:

  • Banks are increasingly exploring opportunities for using artificial intelligence (AI), including machine learning (ML). 
  • Banks' use of AI/ML presents significant opportunities but can also heighten certain risks and challenges. 
  • The Committee intends to continue exploring banks' use of AI/ML, especially in the areas of explainability, governance, and resilience and financial stability.

The paper notes that banks are increasingly exploring opportunities for using AI/ML. AI/ML technology is expected to increase banks' operational efficiency and also facilitate improvements in risk management. While significant opportunities are emerging from the increasing use of AI/ML in many areas of banking, there are also risks and challenges associated with these techniques.

It notes that given the challenges associated with AI/ML, both supervisors and banks are assessing existing risk management and governance practices to determine whether roles and responsibilities for identifying and managing risks remain sufficient. As with other complex operations and technologies, it is important that banks have appropriately skilled staff, which can include model developers, model validators, model users and independent auditors. 

The Committee is working to develop further insights on this topic with a focus on the following areas:  

  • First, the extent and degree to which the outcomes of models can be understood and explained.
  • Second, AI/ML model governance structures, including responsibilities and accountability for AI/ML-driven decisions.
  • Third, the potential implications of broader usage of AI/ML models for the resilience of individual banks and more broadly, for financial stability. 

A copy of the newsletter can be viewed here.

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Basel

ENCU Touts Benefits of Credit Unions in EU Report on Social Taxonomy

The European Network of Credit Unions urged the Platform on Sustainable Finance of the European Commission to consider credit unions and the credit union not-for-profit cooperative model to be classified as their own social taxonomy based on the social benefits that credit unions provide to society.

The Platform on Sustainable Finance issued its Final Report on Social Taxonomy wherein it is focused on aligning the structure of a suggested social taxonomy more closely to the existing environmental taxonomy.

In the letter ENCU suggests that credit unions should be designated as their own social taxonomy because their cooperative structure lends itself to different behavior than investor-owned financial institutions and that difference in behavior produces substantial benefits to the world’s millions of credit union members, to non-members, and the economy as a whole.

Access to affordable, reliable and self-sustainable financial services improves lives on many different levels and credit unions work to expand services to people of all income levels. This makes credit unions uniquely positioned to drive how the financial services industry can better foster financial inclusion. Credit unions model places the interests of their members top of mind, prioritizing personable, altruistic service. The “people helping people” philosophy is at the cored of their “DNA” which operates to the social benefit of all.  Financial inclusion and the nexus with sustainable communities is embodied by the credit union cooperative model.

The letter also notes the work of Donore Credit Union in Ireland wherein it has documented the social benefits of its credit union to society.  Their study documents that for every EUR 1 equivalent invested into Donore Credit Union, in the region of EUR 10 of social value was created.  This is an astounding number that could only be accomplished by the unique cooperative model afforded by a credit union.

A copy of the ENCU comment letter can be viewed here.

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European Commission

WOCCU Advocated Proportionality Included in Climate-Related Financial Risks Standard

The Basel Committee on Banking Supervision published its Principles for the Effective Management and Supervision of Climate-related Financial Risks. The document forms part of the Committee's holistic approach to addressing climate-related financial risks to the global banking system and seeks to improve banks' risk management and supervisors' practices in this area.

The document outlines numerous principles for addressing climate-related risks that will form the bases of requirements from national level regulators when addressing climate-related risks for financial institutions and credit unions.   The principles outline numerous elements that should be included in national-level rulebooks as follows:

  • internal control framework;
  • capital and liquidity adequacy requirements;
  • a risk management process;
  • management monitoring and reporting requirements;
  • comprehensive management of credit risk requirements;
  • comprehensive management of market, liquidity, operational and other risks, and
  • scenario analyses.

WOCCU commented on this document during the consultation process noting that the principles may result in a significant increase in regulatory burden for smaller, community based deposit taking institutions such as credit unions.  The principle of proportionality is key to allowing credit unions to address climate-related risks, but in a manner appropriate for their size and complexity.

The committee included its strong support of the principle of proportionality by including the following language as follows:

  • The principles seek to accommodate a diverse range of banking systems and are intended to be applied on a proportionate basis depending on the size, complexity and risk profile of the bank or banking sector for which the authority is responsible.
  • Supervisors should set expectations in a manner proportionate to the nature, scale and complexity of relevant banks’ activities.
  • Where appropriate, supervisors should determine that banks have in place a scenario analysis programme that is proportionate to their size, business model and complexity, in order to assess the resilience of their business models and strategies to a range of plausible climate-related outcomes
  • Banks should manage climate-related financial risks in a manner that is proportionate to the nature, scale and complexity of their activities and the overall level of risk that each bank is willing to accept.

This strong embrace of proportionality should provide clear direction to credit union supervisors and regulators to engage in the important and necessary process of tailoring these principles for credit unions in manner that does not impose an unreasonable regulatory burden on credit unions while allowing the regulated entity to address climate-related risks.

A copy of the principles can be viewed here.

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Basel

Basel Committee Finalizes Principles for Climate-Related Financial Risks

On May 27, 2022, the Basel Committee met to contend with matters related to climate related financial risks, cryptoassets, G-SIB assessment methodology, and risks and vulnerabilities in the global banking system. Notably, the Committee finalized principles for the effective management and supervision of climate-related financial risks. They finalized a principles-based approach to improve risk management and supervisory practices devised to mitigate risks associated with climate-related financial risks; and these principles were drafted to include proportional application based on a “diverse range of banking systems”.

The Committee further issued a consultation on “the prudential treatment of banks’ cryptoasset exposures” as a follow-up to its consultation released in 2021 on the ‘Prudential treatment of cryptoasset exposures’. The recently released consultation aims to aid in the continued development of a “global minimum prudential framework” to address risks related to cryptoassets. The Basel Committee also reviewed European Banking Union methodologies on cross-border exposures, as well as risk and vulnerabilities to the global banking system in light of the Ukraine conflict.

More information on the Basel Committee’s May 27th meeting is available here.

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Basel

Central Banks Highlight Ways to Tackle Post-Pandemic Private Debt Build-up

A new report from the Committee on the Global Financial System (CGFS), a central bank forum for examining risks to financial stability, hosted by the Bank for International Settlements, highlights that the rise in private sector debt during the Covid-19 crisis was associated with borrowing by weaker businesses and rapid house price growth. However, it finds that the importance of such debt vulnerabilities differs substantially across countries, depending on factors such as the strength of the economic recovery and the health of the financial system.  The report suggests ways that policymakers can tackle debt vulnerabilities in the uncertain post-pandemic macroeconomic environment.

During the Covid-19 crisis, unprecedented policy support prevented debt risks from materializing. But misperceptions about the prospects for similar support in future could lead lenders to underprice risk. Where risks are mounting, borrower-focused macroprudential tools such as limits on debt service-to-income ratios, can help to stem the build-up. Where debt vulnerabilities are already high, or might be exposed by the uncertain macroeconomic environment, policymakers should ensure that financial institutions' capital buffers remain sufficient to absorb potential losses.

Key findings from the report are as follows:

  • Private sector borrowing played a key role in supporting economic activity during the pandemic but higher debt could now pose a risk to financial stability and economic growth
  • Emerging vulnerabilities include higher debt among weaker businesses, booming housing markets, and potential misperceptions about the prospects for exceptional policy support that might cause lenders to underprice risks in the future
  • A surge in private sector borrowing helped to moderate the severity of the Covid-19 economic downturn. Yet, it also shone a spotlight on the risks that high debt can pose to financial stability and macroeconomic performance, according to a new report.

A copy of the report can be viewed here.

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Bank of International Settlements

WOCCU/ENCU Applauds European Parliament Agreement on Digital Operational Resilience Act (DORA)

WOCCU/ENCU Advocated Proportional Treatment Included for Credit Unions

The European Council presidency and the European Parliament reached a provisional agreement on the Digital Operational Resilience Act (DORA), which will overhaul regulations in the financial sector in Europe that sets uniform requirements for the security of network and information systems as well as critical third parties which provide ICT (Information Communication Technologies)- related services to them. This includes services such as cloud platforms and data analytics services.

The World Council of Credit Unions together with its partner the European Network of Credit Unions, and its members from Croatia, Estonia, Ireland, Netherlands, N. Macedonia, Poland, Romania, and Ukraine advocated for the proportional treatment of DORA regulations by urging the governing bodies to consider the size, nature, scale, and complexity of their services, activities, and operations. 

The provisional agreement embraces the WOCCU/ENCU proportionality approach in several ways but most importantly by allowing Member States to establish rules for those entities exempt under Article 2(5) of Directive 2013/36/EU (i.e., CRD IV exempt entities). 

“We thank the European Parliament for listening to our needs and tailoring rules that are appropriate for credit unions but also accomplish our mutual goal of protecting our members information from ICT breaches and ensuring the safe and sound operations of financial institutions”, said Andrew Price, WOCCU Sr. VP of Advocacy/General Counsel. WOCCU/ENCU further thank the many people instrumental in shaping this agreement including:

MEP Billy Kelleher (Ireland), MEP Mairead McGuinness (Ireland), the ENCU Member States (Croatia, Estonia, Ireland, Netherlands, N. Macedonia, Poland, Romania, and Ukraine) and the European Commission.

WOCCU/ENCU will continue to be engaged as the agreement obtains approval by the Council and the European Parliament before going through the formal adoption procedure.

Members of ENCU involved during this process include the following: representatives of the Irish League of Credit Unions (ILCU), National Association of Co-operative Savings and Credit Unions (NACSCU) of Poland, Federation of Romanian Credit Unions (FEDCAR), Estonian Union of Credit Cooperatives (EUCC), North Macedonia's FULM Savings House, and the Dutch Association of Cooperating Credit Unions (VSK).

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ENCU

European Council Approves New Law to Promote the Availability of Data

On May 16, 2022, the European Council approved the Data Governance Act, “to promote the availability of data and build a trustworthy environment to facilitate their use for research and the creation of innovative new services and products.” The Act aims to create a system where the reuse of specific public-sector data categories (trade secrets, personal data and data protected by intellectual property rights), are protected to safeguard privacy and confidentiality. This act accompanies the 2019 Open Data Directive, which covers other data categories including but not limited to material held by ministries, state agencies, municipalities, and organizations largely funded by or under the control of public authorities, i.e., meteorological institutes. A single access point consisting of a searchable electronic register of public-sector data will be made available by the European Commission. The Act further intends to implement a framework for data intermediation services via a digital services platform to provide a secure data sharing network for individuals and companies; simplify voluntary data availability for the common good or “objectives of general interest” (i.e. medical research projects), through a national register; and create safeguards for personal data.

More information on the Data Governance Act is available here.

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Council of the European Union

European Council Takes Position on 2030 Policy Program ‘Path to the Digital Decade’

On May 11, 2022, the European Council adopted its position on the 2030 Policy Programme “Path to the Digital Decade’, which is designed to “strengthen the EU’s digital leadership” through inclusive and sustainable digital policies. Once the European Parliament has confirmed its position, negotiations between Parliament and Council presidency can take place.

The objective of the mandate endeavors to create “concrete digital targets, including for industry which the Union as a whole must achieve by the end of the decade and a novel form of governance with the member states, through a mechanism of cooperation between the Commission and the member states to ensure that the Union jointly achieves its ambition.” The Council contributed a legal basis to the mandate by adding, with respect to governance, that member states and the Commission must cooperate biennially, but the ‘State of the Digital Decade’ report will remain an annual release. The Council also underscored its accord with the Commission Communication of March 2021 on the 2030 Digital Compass, highlighting the importance of fundamental rights.

More information on the 2030 policy program ‘Path to the Digital Decade’, is available here.

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Council of the European Union

FSB Publishes Report on Interaction Between USD Funding and External Vulnerabilities in EMEs

On April 26, 2022, the Financial Stability Board released a report, US Dollar Funding and Emerging Market Economy Vulnerabilities (EMEs), outlining its findings of work in collaboration with the IMF on the interaction between US dollar funding and external vulnerabilities in emerging market economies. The collaboration with the IMF is part of the FSB’s work programme on non-bank financial intermediation, intended to enhance the resilience of non-bank financial intermediation (NBFI).

The report discusses EME vulnerabilities stemming from foreign currency borrowing, and necessary policy measures to address those vulnerabilities supported by analysis of EME capital flows during March 2020, with an emphasis on the non-bank investor roles. These measures include a concentration on the “build-up of foreign exchange mismatches"; enhancing crisis management tools; and addressing data gaps to "facilitate risk monitoring and the timely adoption of policies.” Generally, the report highlights EME vulnerabilities derived from external funding and non-bank financing, while illuminating the policy work that both the FSB and the IMF must do in their respective countries and internationally to increase EMEs resilience to “future shocks”.

More information on the report and EME vulnerabilities is available here and here.

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Financial Stability Board

FSB Chair Drafts Letter to G20 Highlighting Financial Effects of Russian Invasion of Ukraine

On April 20, 2022, the Financial Stability Board (FSB) published a letter from its Chair, Klass Knot, to the G20 Finance Ministers and Central Bank Governors in preparation for a meeting that took place on the same day. The letter outlined the status of global financial stability as well as the FSB’s plans to address emerging vulnerabilities. The letter further discusses the effects of Russia’s invasion of Ukraine on the global financial market including large price fluctuations and “concerns about the growth and potential use of crypto-assets”; however, these effects are far exceeded by the impact of the COVID-19 pandemic. Still, the Russian invasion is concerning as it is triggering inflation, which could promote restrictive financing; additionally, growing vulnerabilities may begin to present themselves in a material way, for example, high debt levels within the non-financial sector, and stretched valuations.

Issues of particular concern include linkages between commodity markets and the financial system; “financial system leverage and possible amplifiers in the event of market stress... and cyber risks”; heightened geopolitical tensions and rising energy and food prices within many emerging markets and developing economies are tacked on to already existing economic stressors from the pandemic; and “reduced policy space and tightening global financial conditions”. The FSB outlined actions items that include work on regulation and supervision of unbacked crypto-assets and stablecoins; increased monitoring of emerging vulnerabilities and market developments; continued work on G20 initiatives such as COVID-19 exit strategies and remedies; an upcoming report on US dollar funding and EME vulnerabilities related to external financing; and ongoing policy work related to financial risks from climate change.

More information on the FSB’s letter to the G20 is available here.

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Financial Stability Board, G20

European Council’s Position on European Green Bonds Proposal is Greenlighted

The European Council’s position on a proposal to create regulation supporting European Green Bonds was given the go ahead by EU permanent representatives as part of the EU’s objective to “implement its strategy on financing sustainable growth and the transition to a climate-neutral, resource-efficient economy.” The next steps involve negotiations with Parliament to establish a final version of the text. Issuers of the European Green Bond (EuGB), which are environmentally sustainable bonds, will be subject to uniform requirements when issuing these bonds to investors within the European Union. The regulation will further establishes a registration system and supervisory framework for EU green bonds that are reviewed outside of the Union.

More information on the Council's proposal for European Green Bonds is available here.

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Council of the European Union

Basel Committee Releases Newsletter on Third- and Fourth-Party Risk Management and Concentration Risk

The Basel Committee on Banking and Supervision released a newsletter underscoring internal discussions and outreach sessions took place to improve third- and fourth-party risk management and concentration risk to support day-to-day activities for banks and supervisors. The newsletter further highlighted concerns regarding operational risks that have emerged during the pandemic related to third-party provided technology-based services. Last month the Basel Committee, in response to some of these issues, released Principles for Operational Resilience (POR) and revised its Principles for the Sound Management of Operational Risk (PSMOR). During the Committee’s outreach sessions with private sector participants and supervisors, it was noted that:

  • “Primary gaps relating to firms' third-party risk management include a lack of clarity regarding respective bank and service provider responsibilities, insufficient monitoring of critical fourth parties, inadequate challenge or oversight from second lines of defence, and a lack of developed and tested business continuity plans.
  • Banks and supervisors are concerned that a lack of complete supply chain transparency may increase operational risk. Risk-management efforts are focused on immediate suppliers, though key risks stemming from outsourcing arrangements may be driven by suppliers further down the supply chain.
  • While several banks maintain formal exit strategies with respect to critical suppliers, they often lack sufficient detail and testing, and identifying the appropriate stage to execute a strategy can be unclear.
  • There are a range of tools for managing operational disruptions, such as the substitutability of a third-party service provider and contracting for enhanced resilience options or service levels offered by service providers. Exit strategies designed to guide transitions that occur over longer time periods may not be as useful as other tools for curing operational disruptions.”

The full newsletter is available here.

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Basel

Financial Stability Board Publishes Work Programme for 2022

On March 31, 2022, the Financial Stability Board (FSB) published the FSB Work Programme for 2022, which outlines priorities, new initiatives, continuing items or those reaching completion, regular monitoring and reporting, and key deliverables to the G20 Indonesian Presidency. Some of the FSB’s priorities and initiatives include:

  • Supporting international cooperation and coordination on current financial stability issues. This includes reinforced monitoring using the new surveillance framework, in light of the Russia-Ukraine conflict and its economic impacts. Further, the FSB will follow-up “on the lessons learnt from COVID-19 for financial stability report, and a report on exit strategies and effective practices for addressing the effects of COVID-19 scarring in the financial sector.”
  • Enhancing the resilience of non-bank financial intermediation (NBFI). 
  • Enhancing cross-border payments. The FSB will implement actions under its roadmap to enhance cross-border payments; and will deliver a progress report to the G20, along with “the development of key performance indicators to monitor progress towards the quantitative targets for the roadmap.”
  • Harnessing the benefits of digital innovation while containing its risks.  The FSB will focus on crypto-assets, such as decentralised finance (DeFi); and will continue to concentrate on enhancing operational and cyber resilience.
  • Addressing financial risks from climate change. “The FSB will continue to coordinate international work through its roadmap for addressing climate-related financial risks. The FSB’s own initiatives under the roadmap will focus on building and strengthening the analytical basis for monitoring climate-related risks to financial stability; identifying regulatory and supervisory approaches to address climate-related financial risks; and taking stock of progress in the implementation of the roadmap.”

More information on the FSB’s 2022 work programme is available here.

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Financial Stability Board

WOCCU Urges G20 to Help Credit Unions Advance Financial Inclusion

The World Council of Credit Unions (World Council) urged the G20 to continue its commitment to financial inclusion and its objective reduce inequalities and promote inclusive growth.   Specifically, World Council asked the G20 to direct the international standard setting bodes to work closely with national-level regulators to fully adopt proportional tailoring of regulations for the purposes of advancing financial inclusion.

National-level regulators are often reticent to tailor international norms and standards for fear that a deviation may subject them to criticism from other nations or fear of an unintended consequence as a result of right-sizing regulations.  The result is that credit unions are often prevented from serving underserved or marginalized populations, thus leading to financial exclusion.

The collective international credit union movement is urging the G20 to take action to enhance its embrace of financial inclusion and work with the many challenges faced by national-level regulators in achieving financial inclusion vis-à-vis proportionality.  Proportionality, if applied appropriately, can significantly advance the G20’s goals of promoting financial inclusion by fostering responsible finance through increased access to responsible and affordable financial services.

The G20 this year is headed by the Presidency in Bali, Indonesia with a Leaders’ Declaration expected to be issued at the 2022 G20 Bali Summit in November. 

 A copy of the letter can be viewed here.

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G20

FSB Releases Report on FinTech’s Impact During the COVID-19 Pandemic

On March 21, 2022, the Financial Stability Board (FSB) released a report entitled, FinTech and Market Structure in the COVID-19 Pandemic: Implications for financial stability. The key takeaway of the report credited the COVID-19 pandemic for the acceleration of digitization of retail financial services. The report also discussed individual engagement with “innovative financial service providers and traditional financial incumbents”; the expansion of BigTechs and larger FinTechs into financial services and the data gaps they present; and whether the benefits of digital acceleration during the pandemic will become structural or will “revert back” to pre-pandemic levels as the current conditions go back to normal.

While the FSB commented that the arrival of BigTech and FinTech firms in the market could result in the improvement of cost efficiencies and broaden financial inclusion benefits for underserved groups, some concern was expressed over the risk that BigTech and FinTech firms may achieve market dominance. The report further laid out steps authorities have made during the pandemic to establish policy actions related to financial stability, competition, data privacy, and governance issues. It also stressed “the importance of cooperation between regulatory and supervisory authorities, including those charged with overseeing the bank and non-bank sectors, and where relevant, with competition and data protection authorities.”

More information on the FSB’s report is available here.

See also, BIS Releases Commentary Crediting Covid-19 for the Acceleration of Digitalization of Payments.

 

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Financial Stability Board

WOCCU Applauds FATF Strengthening of Beneficial Ownership Standards

The Financial Action Task Force made amendments to FATF Recommendation 24 and its Interpretive Note to strengthen the international standards on beneficial ownership of legal persons to ensure greater transparency about the ultimate ownership and control of legal persons.  This not only will mitigate the risks of their misuse, but will require Countries to have a public authority or body function as a beneficial ownership registry (or alternative mechanism) that can provide efficient access to adequate, accurate and up-to-date beneficial ownership information by competent authorities.

If implemented properly, these changes have the potential to reduce the regulatory burden for credit unions at account opening when performing due diligence for purposes of their AML/CFT requirements.  Obtaining beneficial ownership information often present numerous challenges for credit unions and at times can prevent access to legitimate financial transactions or services.

Further, the rules will address the significant misuses of legal persons for money laundering, terrorist financing, and also for proliferation financing in many jurisdictions. 

WOCCU has consistently called for such a database to be maintained by national authorities that credit unions can rely on when performing their AML/CFT obligations. 

A copy of the release by FATF can be viewed here.

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FATF

Basel Committee Releases Newsletter on COVID-19 Related Credit Risk Issues

On March 2, 2022, the Basel Committee on Banking Supervision issued a newsletter on COVID-19 related credit risk issues they believe will be helpful to support the day-to-day activities of banks and supervisors. The newsletter addresses: the Committee’s intention to continue to assess credit risk and asset quality by maintaining their monitoring of bank practices, in addition to administering necessary provisions; observations from supervisors regarding policies and practices across banks' credit risk governance and credit risk models; and challenges to assessing the creditworthiness of borrowers due to the COVID-19 pandemic.

The Committee highlighted that the key applicable elements of risk include, risks related to supervisory concerns that residual support measures may mask creditworthiness and therefore borrowers’ “future debt servicing capacity"; supervisory fears over whether bank provisions are capturing risk; uncertainty that supervisors feel around the adequacy of governance or boards to assess unlikeliness to pay (UTP), in addition to “incorporating public support measures in data reporting”; and supervisory observations that banks are applying “sizeable judgment-based adjustments to their internal ratings-based (IRB) approach and provisioning models, reflecting the pandemic environment,” as well as their belief that bank controls and governance that support model adjustments need improvement.

The Committee will continue to focus on the following credit risk topics in 2022:

  • “particular asset classes (eg residential real estate, commercial real estate and leveraged lending) that may be generating supervisory concerns in specific regions;
  • indicators and triggers for UTP assessments, particularly for loans subject to moratoriums;
  • controls and governance around credit risk models and model adjustments in the pandemic environment; and
  • the use and incorporation of data over the COVID-19 period, particularly whether and how it should inform future credit model development, testing and validation.”

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

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Bank of International Settlements, Basel

European Council Agrees to Position on Corporate Sustainability Reporting Directive

On February 24, 2022, the European Council adopted its position on a corporate sustainability reporting directive (CSRD), a proposal drafted by the European Commission, that will correspond with the European sustainable finance strategy. The Commission’s proposal is revision of the non-financial reporting directive from 2014, and “will increase a company’s accountability, prevent divergent national standards and ease the transition to a sustainable economy.”

According to the Minister for Economic Affairs, Finance and Recovery, Bruno Le Maire, after prompting from the French Presidency, the adoption is a step towards a European regulatory framework for sustainable finance. He stated that, “…companies with more than 250 employees or listed companies will now have to translate their environmental, social and governance policy into standardised, justified and certified information documents. This means greater transparency for citizens, consumers and investors so that businesses can play their full part in society. This is the end of greenwashing. Today, Europe is setting the rigorous non-financial reference standards of tomorrow, in line with our environmental and social ambitions.”

The proposal includes:

  • an extension of the scope to all large companies and companies listed on a regulated market (except listed micro-companies)
  • a certification requirement for sustainability reporting
  • more detailed and standardised requirements on the information to be published by companies
  • improved accessibility of information, by requiring its publication in a dedicated section of company management reports

More information on the Council’s adoption of the CSRD is available here.

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Council of the European Union, European Commission

European Council Updates Non-Financial Reporting Directive

The European Council amended the scope of the non-financial reporting directive (NFRD), which was proposed by the European Commission, in order to alleviate overburdensome reporting requirements for listed SMEs, and also giving SMEs time to adapt to the new rules. The objective of Commission’s proposal is intended to focus on deficits within the existing rules related to disclosure of non-financial information which the Commission not only believes will prevent a necessary transition to a sustainable economy, but “…was of insufficient quality and comparability to allow it to be properly taken into account by investors.” The Commission will adopt, by delegated act, a definition of sustainability reporting standards, thereby harmonizing sustainability data. The directive will be adopted subsequent technical advice given by certain European agencies and the European Financial Reporting Advisory Group (EFRAG).

More information on NFRD updates is available here.

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Council of the European Union, European Commission

Bank for International Settlements Releases Green Bond Fund for Asia

The Bank for International Settlements (BIS) launched the Asian Green Bond Fund to aid green project finance investments within the Asia and Pacific region. The fund will support environmental projects such as renewable energy production and energy efficiency within this region. The open-ended, USD-denominated fund was developed with the assistance of the BIS Asian Consultative Council and in collaboration the Asian Development Bank, development financing community, and other stakeholders. Generally, the fund will help channel central bank reserves to green projects in the Asia and Pacific region. Since 2019, BIS has launched two other green bond funds totaling $3.5 billion in green bond funds for central banks and “other official sector investors.”

More information on the Asian Green Bond Fund is available here.

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Bank of International Settlements

WOCCU Urges Proportionality in Climate Principles

The World Council of Credit Unions urged the Basel Committee on Banking Supervision to include proportionality in its Principles for the Effective Management and Supervision of Climate Related Financial Risks.    The comments came as a response to the Basel Committee’s request for comments on its efforts to address the physical and transition risks that could affect the safety and soundness of individual financial institutions as a result of climate-related financial risks.  The Basel Committee is looking to strengthen the regulation, supervision, and practices of financial institutions worldwide.

WOCCU urged the Basel Committee to provide clear guidance for prudential supervisors that a proportional and risk-based approach is necessary not only to prevent overburdensome regulation on smaller financial institutions, but to advance the Commission’s objective to bolster financial inclusion.

The principles seek to impose numerous requirements for credit unions in addressing climate-related risks including and internal control framework, capital and liquidity adequacy requirements, a risk management process, management monitoring and reporting requirements, comprehensive management of credit risk requirements, comprehensive management of market, liquidity, operational and other risks, and scenario analyses.

While WOCCU supports addressing climate-related risks, these requirements need to be in proportion to the size, risk and complexity of the institution.

A copy of the letter can be viewed here.

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Basel

FSB Chair Publishes Letter to the G20 Regarding 2022 Deliverables

In advance of a meeting set for February 17 through 18, 2022, the Financial Stability Board (FSB) published a letter from their chair, Klass Knot, to the G20 Finance Ministers and Central Bank Governors. The letter details the work the FSB is doing this year to promote sustainable growth and global financial resilience in response to continuing COVID-19 issues such as uneven recovery across regions, inflation and record-high global debt levels. The FSB credits “determined” policy response and G20 post-2008 crisis reforms for current recovery successes which include bank and market infrastructure resilience.

These successes do not come without their challenges as the financial market is still dealing with COVID-19 fallout and trying to acclimate to what a post-pandemic market may reveal, including its effect on interest rates and asset prices, and vulnerabilities created by digital innovation. The FSB letter laid out the policy work planned for 2022 in response to efforts necessary for the market to transition to post-pandemic life, which include:

  • “Supporting financial market adjustment to a post-COVID world including work on policy considerations to support a more even, sustainable and inclusive global recovery, and on effective financial sector practices for national authorities to consider for addressing the effects of COVID-19 scarring.
  • Reinforcing financial system resilience in light of the COVID experience focusing on the FSB’s work to strengthen resilience in the non-bank financial intermediation (NBFI) sector through its NBFI work programme, including policy proposals to address systemic risk in NBFI.
  • Harnessing the benefits of digitalisation while containing its risks including implementing the G20 Cross-Border Payments Roadmap and its associated quantitative targets; work to address the financial risks posed by crypto-assets; and developing best practices for regulatory reporting of cyber incidents.
  • Addressing financial risks from climate change. Work here will focus on progressing the FSB’s roadmap for addressing climate-related financial risks.”

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

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Financial Stability Board, G20

Financial Stability Board Leery of Emerging Risks from Crypto-Assets

In a newly released report, Assessment of Risks to Financial Stability from Crypto-assets, the Financial Stability Board (FSB) warns that crypto-assets could be a threat to global stability. The FSB argues that characteristics such as scale, structural vulnerabilities and interconnectedness with the “traditional’ financial system are considerable factors which may lead to financial instability on a global scale. The report further details developments and related vulnerabilities within unbacked crypto-assets, (i.e. Bitcoin); stablecoins; and decentralized finance (DeFi) in addition to other crypto-asset trading platforms, calling for “timely and pre-emptive evaluation of possible policy responses.”

While instability may not be imminent, according to the FSB, the crypto-asset market is growing exponentially, and could quickly become an issue. The FSB points out that in 2021, the market grew 3.5 times in capital to $2.6 trillion, which is fraction of the global assets within the financial system but still represents a rapid rate of growth. The report highlights Decentralized Finance (Defi) as an emerging sector that is quickly making an impact, stating that, “Some of these platforms operate outside of a jurisdiction’s regulatory perimeter or are not in compliance with applicable laws and regulations. This presents the potential for concentration of risks, and underscores the lack of transparency on their activities.”

More information on the FSB’s report can be found here and here.

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Financial Stability Board

LIBOR Lingers… Here’s What Still Needs to Happen

While most LIBOR settings have been published for the last time, work to finalize the LIBOR transition still remains. In a recent press release, the Bank of England, the Financial Conduct Authority (FCA), and the Working Group highlighted achievements in the sterling markets and outlined what must still take place, as well as how the Working Group plans to operate in the future:

  • “The Bank of England, FCA and the Working Group encourage firms to continue to pursue the active transition of legacy sterling LIBOR contracts currently using the temporary synthetic LIBOR.”
  • The Bank of England reports that less than 2% of total sterling LIBOR stock remains and that firms will address the residual exposure.
  • Transition from US dollar LIBOR: Effective at the start of 2022 and in accordance with US supervisory guidance, the FCA is prohibiting its use for certain new contracts. UK supervised entities should have already ceased its use with limited exception. The Bank of England, FCA and the Working Group suggest using alternative rates such as SOFR. (Supervisors are continuing to monitor the progress of the transition for UK regulated entities.)
  • “Continued active conversion of legacy sterling LIBOR-linked bonds and loans that are dependent on temporary synthetic LIBOR”. The Working Group touted its success in transitioning to SONIA across sterling derivative, loan and bond markets. With new objectives supported by the Bank of England, the Working Group also plans to evaluate the implications of non-sterling LIBOR transition in UK markets.

More information on the final days of the LIBOR transition can be found here.

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Financial Conduct Authority

The Basel Committee’s Oversight Body Renews its Commitment to Basel III Implementation

On February 9, 2022, the Basel Committee’s oversight body, the Group of Central Bank Governors and Heads of Supervision (GHOS), met to not only reappoint Pablo Hernández de Cos as Chair for a second term, but to reaffirm its “commitment to implementing all aspects of the Basel III framework”. The GHOS reviewed progress of the Basel III implementation process and pushed for implementation in “a full, timely and consistent manner to provide a regulatory level playing field for internationally active banks”; which was followed by full agreement from all members. Under the purview of the Regulatory Consistency Assessment Programme, the GHOS further obligated the Basel Committee to continue to monitor implementation of the framework. The GHOS is currently looking to fill its Chair vacancy as their previous Chairman, François Villeroy de Galhau, stepped down to accept his appointment as Chair of the Board of Directors of the Bank for International Settlements.

More information regarding current GHOS endeavors is available here.  

 

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Bank of International Settlements, Basel