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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

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

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

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

BIS CPMI report Highlights Rapid Development of Retail Fast Payments

The implementation of retail fast payment systems (FPS) across the globe is continuing at a rapid pace, with significant implications for incumbent real-time gross settlement (RTGS) systems, according to a report published today by the Bank for International Settlements' Committee on Payments and Market Infrastructures (CPMI).

Developments in retail fast payments and implications for RTGS systems takes stock of recent developments in retail FPS, discusses the implications for RTGS systems and examines the role of central banks in these systems.

Based on a survey of CPMI member jurisdictions, the report highlights the following findings and implications:

  • global implementation of fast payments is continuing at a rapid pace;
  • the use of a given FPS (ie adoption rate) is generally low in the early stages of its implementation, although some recent FPS have been more rapid in their take-up;
  • FPS can have significant implications for the operations and services of RTGS systems in the same jurisdiction, such as the modification of access criteria and extension of operating hours;
  • FPS are increasingly settling obligations between banks and, where relevant, non-bank FPS participants on a gross (ie payment-by-payment) basis in real time;
  • most jurisdictions have either adopted or are moving towards ISO 20022 as the messaging format for their FPS; and
  • while differences in approaches remain, central banks tend to play important roles in facilitating the operations of FPS.

The report also highlights that designing, implementing and operating an FPS is complex. Challenges include ensuring high system availability (eg during nights and weekends) and reliability requirements.

A copy of the release can be viewed here.

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Bank of International Settlements

Digital Currencies and the Soul of Money

Agustín Carstens, General Manager of the Bank for International Settlements (BIS), outlined his view on the plausible scenarios for the future of money at the Goethe University's Institute for Law and Finance (ILF) conference on "Data, Digitalization, the New Finance and Central Bank Digital Currencies: The Future of Banking and Money.

Carstens offered  three plausible scenarios for the future of money.

  • In the first, big tech stablecoins compete with national currencies and against each other too, fragmenting the monetary system.
  • The second relates to the elusive promise of crypto and decentralised finance, or "DeFi", which claims to offer a financial system free from powerful intermediaries, but may actually deliver something very different.
  • The third realises the vision of an open and global monetary and financial system that harnesses technology for the benefit of all.

Carstens urged development of the third vision noting the design of money has consequences that concern all of society: the integrity and stability of money and payments, market concentration, consumer rights and efficiency. Hence, he urged central bankers to work with other public authorities and private stakeholders to achieve this vision.  He urged innovation in a sound, sustainable way, harnessing the benefits of digital technology in a way that is consistent with our shared values. The goal of ensuring that the financial system builds on the existing governance of money, serves the public interest and works cooperatively with the private sector was of paramount importance.

A copy of the entire speech can be found here.

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Bank of International Settlements

Correspondent Banking Relationships Continue to Decline

Correspondent banking trends continued in 2020, with the volume and value of transactions increasing despite the changing payments landscape during the pandemic, according to new data published today by the Committee on Payments and Market Infrastructures (CPMI).

Cross-border payment volume and value increased by 2% and 7%, respectively, in 2020. Correspondent banking relationships declined by 4% from the previous year, taking their total contraction to about 25% between 2011 and 2020.

Following a decline in early 2020, when the beginning of the pandemic induced a bout of market turmoil, the volume and value of correspondent banking rebounded, and the downward trend in relationships stabilised.

Some of the key factors contributing to the rapidly changing payments landscape, such as innovation, are discussed in detail in the Bank for International Settlements March 2020 Quarterly Review.

As the increase in volume and value of transactions shows, correspondent banking relationships continue to play a pivotal role in cross-border payments, despite their worldwide decline.

They offer an important payment channel for firms and households, and a critical loss of relationships could hurt financial inclusion, raise the cost of payments and push payments activity into less regulated areas.

The data was provided by SWIFT based on payment messages from more than 200 countries and jurisdictions.

A copy of the Release can be viewed here.

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Bank of International Settlements

BIS CPMI Report Highlights Challenges with Retail Fast Payments

The implementation of retail Faster Payment Systems (FPS) across the globe is continuing at a rapid pace and may have significant implications for the financial sector pursuant to a report published by the Bank for International Settlements' Committee on Payments and Market Infrastructures (CPMI). The report, Developments in retail fast payments and implications for RTGS systems takes stock of recent developments and discusses the implications for financial institutions and examines the role of central banks in these systems.

The report highlights the following findings and implications:

  • global implementation of fast payments is continuing at a rapid pace;
  • the use of a given FPS (ie adoption rate) is generally low in the early stages of its implementation, although some recent FPS have been more rapid in their take-up;
  • FPS can have significant implications for the operations and services of RTGS systems in the same jurisdiction, such as the modification of access criteria and extension of operating hours;
  • FPS are increasingly settling obligations between banks and, where relevant, non-bank FPS participants on a gross (ie payment-by-payment) basis in real time;
  • most jurisdictions have either adopted or are moving towards ISO 20022 as the messaging format for their FPS; and
  • while differences in approaches remain, central banks tend to play important roles in facilitating the operations of FPS.

The report also highlights that designing, implementing and operating an FPS is complex with challenges including the need to ensure high system availability (eg during nights and weekends) and reliability requirements.

A copy of the release can be viewed here.

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Bank of International Settlements

BIS Releases Commentary Crediting Covid-19 for the Acceleration of Digitalization of Payments

The Bank for International Settlements’ (BIS) Committee on Payments and Market Infrastructures (CPMI) released a commentary entitled, “Covid-19 Accelerated the Digitalisation of Payments“, asserting that the current acceleration of the digitalization payments is a consequence of the Covid-19 pandemic. In summary, the commentary contends that the CPMI’s latest Red Book Statistics demonstrates a consumer shift from cash to digital/contactless payment options at an “unprecedented” rate; and that the value of circulated cash has surged.

Key take aways from the commentary:

  • "The Covid-19 pandemic has boosted the use of digital and contactless payments.
  • Cash in circulation reached a decade high due to a surge in demand for high-value banknotes, suggesting that cash was increasingly held as a store of value rather than for making payments.
  • The pandemic has added to the motivations of central banks to develop central bank digital currencies (CBDCs)."

More information on the CPMI’s commentary is available here.

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Bank of International Settlements

FSI Addresses Role of Climate Related Prudential Policy

A recent speech by Fernando Restoy, Chairman, Financial Stability Institute, Bank for International Settlements addressed the role of prudential policy as it relates to climate change.

Restoy noted that banks are exposed to climate change through two different sets of climate risk drivers:  1.  Through physical risks resulting from the increasing frequency of extreme weather events; and 2. Transactional risk resulting from disruption from the cumulative effects of changes in government policies and in technology and consumer and investor behavior which in turn can erode the value of banks’ credit exposures on the corresponding collateral.  

He notes that the physical and transition risks manifest themselves in the form of credit, market and liquidity risks. In addition, climate-related developments can increase operational risk by affecting business continuity and by giving rise to litigation and reputational losses.

Restoy concludes that the role of prudential regulators is to thoroughly analyze the financial impact of climate change on safety and soundness and to make adjustments to protect the stability of the financial system.  The key will be achieving the right balance between disclosure obligations, supervisory action, and the adjustment of capital requirements if appropriate.

A transcript of the entire speech can be viewed here.

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Bank of International Settlements

BIS Reports on How COVID-19 Policy Measures Supported Lending

The Bank of International Settlements recently released a report entitled "Covid-19 Policy Measures to Support Bank Lending to review policies designed to support lending.   The report noted that in the wake of the Covid-19 fallout, policymakers enacted a wide range of measures to support the flow of credit. Some measures strengthened banks' lending capacity by preserving their capital and encouraging flexibility in loss accounting. Others, such as state-backed loan guarantees or funding for lending programmes, incentivized banks to use their available capacity.  It found that both types of measures contributed to lending growth.  In particular, the report contained the following key takeaways:

  • Since the start of the Covid-19 pandemic, policy measures have supported lending by enhancing banks' balance sheet capacity and creating incentives for banks to use this capacity.
  • Strong balance sheets allowed banks to accommodate credit line drawdowns at the start of the pandemic, while subsequent policy measures supported further lending.
  • Small and medium-sized enterprises, particularly those in sectors hard hit by the pandemic, expanded their borrowing by more in countries with more generous guarantee programmes.
A copy of the report can be viewed here.
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Bank of International Settlements

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

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

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

BIS Innovation Hub Announces Key Priorities to Advance Financial Technology

On January 22, 2021, the Bank for International Settlements Innovation Hub (BISIH) announced a work programme focusing on six key areas to address “international collaboration among central banks on innovative financial technology”. These areas include: suptech and regtech; next-generation financial market infrastructures; central bank digital currencies; open finance; green finance; and cyber security.

In addition to launching the Innovation Network to support their priorities, BISIH plans to launch a series of projects including:

  • “a proof of concept solution for a regulatory reporting platform employing data analytics and data visualisation to provide supervisors with deeper and more timely insights to address risks;
  • a proof of concept platform using multiple wholesale CBDCs to explore the feasibility of faster and cheaper cross-border payments;
  • a technological research project and associated prototype(s) for tiered retail CBDC distribution architectures; and
  • a distributed ledger technology prototype for distribution of tokenised green bonds to retail investors.”

More information regarding the Bank for International Settlements Innovation Hub work programme and the Innovation Network can be found here.

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Bank of International Settlements

BIS Highlights Covid-19 Cyber Risks

The Bank for International Settlements (BIS) highlighted cyber risks in the financial sector in its recent issued BIS Bulletin.  The conclusions of this document notes the following:
  • The financial sector has been hit by hackers relatively more often than other sectors during the Covid-19 pandemic.
  • While this has not yet led to significant disruptions or a systemic impact, there are substantial risks from cyber attacks for financial institutions, their staff and their customers going forward.
  • Financial authorities are working to mitigate cyber risks, including through international cooperation.
A copy of BIS Bulletin No. 37 can be viewed here.
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Bank of International Settlements

BIS Issues Report on Central Bank Digital Currency

A group of seven central banks together with the Bank for International Settlements (BIS) today published a report identifying the foundational principles necessary for any publicly available Central Bank Digital Currencies (CBDCs) to help central banks meet their public policy objectives. The report outlines foundational principles and core features of a CBDC.

The report, Central bank digital currencies: foundational principles and core features, was compiled by the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, Sveriges Riksbank, the Swiss National Bank and the BIS, and highlights three key principles for a CBDC:

  • Coexistence with cash and other types of money in a flexible and innovative payment system.
  • Any introduction should support wider policy objectives and do no harm to monetary and financial stability.
  • Features should promote innovation and efficiency.

The group of central banks will continue to work together on CBDCs, without prejudging any decision on whether or not to introduce CBDCs in their jurisdictions.

A copy of the report can be viewed here.

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Bank of International Settlements

FSI Reports on COVID-19 Supervisory Challenges

The Financial Stability Institute(FSI) of the Bank for International Settlements (BIS) issued its report on the prudential response to debt under COVID-19:  the supervisory challenges.  The highlights of the report are as follows:

  • In response to the Covid-19 pandemic, governments and banks have introduced public guarantees and payment deferrals to support struggling borrowers, while the Basel Committee on Banking Supervision (BCBS) and national authorities have provided guidance on how these relief measures should be considered in assessing credit risk in prudential frameworks.
  • The regulatory relief measures introduced by the BCBS provide banks with flexibility in supporting the real economy. But they also raise supervisory challenges that become more pronounced the longer the relief measures remain in place, particularly if credit risks continue to mount on bank balance sheets.
  • The greatest challenge for all prudential authorities is to decide how and when to exit from these regulatory relief measures. Acting too early may remove much needed credit to support economic growth, while waiting too long could undermine confidence in the post-crisis regulatory regime and heighten systemic risks. Making the right calls at the right time will require judgment.
A copy of the report can be viewed here.
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Bank of International Settlements

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

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

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 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

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