Where is My Reward?
Volume 11, Number 4
April 28, 2021
Advocacy News You Can Use
Fareed Zakaria had an excellent article in the Washington Post earlier this month. The focal point of the article underlined the notion that, from a public policy standpoint, we spend too much time thinking about risk instead of considering the reward. Zakaria makes the point that in government the incentive is always to take every precaution and spend as much money as necessary to ensure that bad things don’t happen. Further, you are punished when bad things happen, but by contrast, if you make many good things happen, you rarely get more than a pat on the back.
I often think this is true with AML/CFT regulations, where regulators become so concerned with preventing something bad happening on their watch, that it makes them hesitant to tailor or right-size regulations for fear that it will diminish a standard or create latitude for misuse. They tend to err on the conservative side when it comes to proportionality and are reticent to consider the “reward” side to a risk-based approach to regulations.
This is where I tend to agree with Mr. Zakaria’s article. The reward for tailoring regulations for credit unions from a public policy standpoint is that more vulnerable and underserved populations will be served. The benefits of financial inclusion and financial stability will be greatly improved. My hope is that our regulators will get more than a pat on the back when they engage in adopting proportional regulation. The reward is apparent for all of us.
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.
Why this matters to your credit union: Operational resilience requirements are often designed for large internationally active banks who have complex operations. The inclusion of proportionality allow regulators to right-size regulations for smaller, less complex institutions such as credit unions, thus resulting in less unnecessary regulatory burden.
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.
Why this matters to your credit union: Understanding the Basel Committee’s approach on measuring climate related risks provides us with insight on how potential changes to the capital standards might affect the balance sheets of credit unions. This is an evolving area that will likely bring numerous changes over the next several years.
Basel Committee 2021-22 Work Programme and Strategic Priorities Released
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.
Why this matters to your credit union: It is noteworthy that the Basel Committee is focused on Covid-19 recovery, strengthening supervisory coordination, digitalisation, and climate-related risks. These areas will be the focus of numerous policy changes over the next several years. Understanding this focus will help credit unions with their strategic planning and decision making.
Andrew T. Price, Esq.