Reverberating Consequences
Volume 16, Number 9
September 2024
Advocacy News You Can Use
While international standard setter proposals and new guidance have been slower this month, there is a clear focus on managing volatility and market risks within the financial sector. Rigorous review of past banking failures and financial sector instability continues amongst all the key standard setters. Ensuring financial institutions are prepared for key risks and avoid issues, such as those in 2023, are at the forefront of committee discussions this month.
As credit unions look ahead to the 2025 planning, stress testing for unexpected market changes will be important for preparation and to meet regulator expectations. The consequences of large international banks taking unique risks continue to be felt in the regulatory discussions and supervisory focus going forward.
Bank of International Settlements (BIS) issued an executive summary outlining Operational Continuity in Resolution (OCiR). OCiR refers to a financial institution in resolution’s ability to continue the critical shared services that are needed to maintain or facilitate the wind-down of a financial institution’s critical functions.
The summary notes that digitalization has recently been accompanied by increased reliance on third-party service providers supporting critical shared services, including areas such as data management and storage. This change creates several challenges. Data is now more frequently stored in other jurisdictions and assets may be shared across multiple third-party firms. This could create uncertainty in resolution regarding access to data or legal ownership. The increased digitalisation and reliance on third-party services also increases the chances of a final service involving support from multiple third-party providers with sub-contractors or indirect providers. These arrangements add complexity in service delivery models that may not be adequately captured in operational continuity arrangements.
The summary sets out considerations for approaching operational continuity of critical shared services that are digital. For additional information consult the Financial Stability Board’s Guidance on Arrangements to Support Operational Continuity in Resolution, which includes a recent supplementary note to clarify implementation with the increasing digitalisation of critical shared services.
Click here to read the full executive summary.
Why this matters to your credit union: This is another example of the impact digitalization has on regulatory guidance for financial institutions. Credit unions should review their operational continuity plans to ensure they account for the increasing number of digital services. Specific changes such as contract and governance considerations should be reviewed in operational continuity practices.
Basel Committee Meeting Reviews Recent Risks
The Basel Committee on Banking Supervision met in September to discuss recent market trends and disruptions as well as key supervisory initiatives. The Committee noted several spikes in market volatility in July and August related to large, levered positions and the interconnections with non-bank financial intermediaries. The Committee noted the importance of operational resilience and managing third-party risks.
The Committee also finalized the report on lessons learned from the 2023 banking turmoil. As recommended by the G20, the report builds on earlier documentation with a new emphasis on liquidity risk that will be published in the coming months. The Committee also provided an update on its work to support regulatory supervisors including tools that can be used in their day-to-day work. The tools pertain to liquidity risk, the sustainability of business’ models, and effective supervisory judgment.
Finally, the Committee reviewed comments it received on its recent consultation regarding the proposed disclosure framework on climate-related financial risks.
Click here for more information.
Why this matters to your credit union: Liquidity and sufficient capital are at the forefront of regulator conversations worldwide. However, credit unions face unique challenges in accessing liquidity and raising capital. It is vital that credit unions continue to discuss their unique structure and differing risk matrix with their national level and local supervisors.
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Erin O'Hern |