One More Step
Volume 11, Number 6
June 30, 2021
Advocacy News You Can Use
As many of you are aware, WOCCU advocates strongly for proportionality to be included in every international standard so that rulebooks can be tailored appropriately for credit unions and that our operating model is adequately considered. This year, the G20 is being led by the Italian Presidency and will focus, in part, on issues of financial inclusion. I hope that they are able to make the connection between proportionality and the importance of it to smaller financial institutions. Proper implementation of proportionality in regulations for smaller cooperative depository institutions such as credit unions can greatly reduce inequalities and promote inclusive growth. More importantly, 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.
To that end, it was heartening to see the comments of Ignazio Visco, the Governor of the Bank of Italy, who gave a keynote address to the 2021 IIF G20 Conference-The G20 Agenda Under the Italian Presidency. In his address, Mr. Visco commented on financial inclusion noting that the shift to digital financial services deserves close attention since it offers new opportunities but, if not carefully governed, could also generate undesirable consequences. Not only may it lead to new forms of exclusion, making access to finance more unequal, but it may also favor irresponsible financial behavior, such as over-indebtedness. He noted that ensuring that the benefits of digitalization are widely shared (and thus financially inclusive) will depend largely on the accessibility of digital infrastructures, the degree of financial and digital literacy, and the adequacy of governance, especially in the fields of regulation and supervision.
These statements are encouraging, and I expect to see similar language in the G20 Leaders’ Declaration in October. I anxiously await to see if they can take it one more step and make the connection between proportionality, financial inclusion and, more importantly, the critical role that credit unions can play.
On June 4, 2021, the Basel Committee on Banking Supervision met to cover the following issues related to the effect of COVID-19 on the current banking system:
- Discussion on “COVID-19 risks to banking system, reviews provisioning practices and stresses importance of using capital and liquidity buffers.
- Review of interim report evaluating impact of Basel framework during COVID-19.”
- Agreement “to hold public consultation on prudential treatment of cryptoasset exposures.”
While the world is beginning to re-open, the Committee cautioned that banks and supervisors should still remain watchful for COVID-19 risks and vulnerabilities by using, among other things, “Basel III capital and liquidity buffers to absorb shocks and maintain lending to creditworthy households and businesses,” and strengthening operational resilience. The Committee also evaluated post-crisis reforms by reviewing an interim report, which gave a preliminary assessment of the impact that Basel III standards had during the pandemic. Cryptoassets’ market developments were also covered during the meeting, as well as “next steps in developing its prudential treatment for banks' cryptoasset exposures.”
More information on the June 4th Basel Committee meeting is available here.
Why this matters to your credit union: How the Basel Committee will approach the withdrawal of many of the relief measures passed during the COVID-19 crisis will have a direct impact on the balance sheet of credit unions. Understanding the approaches and views of the Basel Committee will help credit unions prepare for the impact.
Financial Stability Board Requests Response to Public Consultation on Cross-Border Payments
The Financial Stability Board (FSB) announced they were seeking response to their public consultation, Targets for Addressing the Four Challenges of Cross-Border Payments. The global targets proposed are intended to improve cost, speed, transparency and access to cross-border payments via the FSB’s Roadmap for Enhancing Cross-border Payments. “The quantitative targets proposed are a foundational step in the G20 Roadmap for Enhancing Cross-border Payments, which was endorsed by G20 Leaders in November 2020."
The FSB expects individual targets to be met by end of 2027, however, remittance cost targets are set for 2030 by the United Nations Sustainable Development Group Goal (UN SDG), which is endorsed by the G20.
The FSB anticipates that a final report consisting of final targets will be completed by October of this year. By this date, the FSB states they will have developed an “implementation approach for monitoring the targets that will set out:
- how targets will be measured and data sources and data gaps to be filled;
- how progress towards meeting the targets will be monitored; and
- the frequency of data collection and publication.”
Why this matters to your credit union: International standard setting bodies, at the direction of the G20 are focused on reforms to payments systems around the world with a focus on faster, cheaper and more transparent payments networks. This will bring significant changes to how credit unions engage in payments of all types and could have a disruptive effect on revenue, income and the industry’s role in payments.
Financial Stability Board Supports End of LIBOR by End of 2021
LIBOR is coming to an end. While many USD settings will continue until the end of 2023, the majority of LIBOR panel of global banks will cease by the end of 2021. In March, the ICE Benchmark Administration (IBA) and the Financial Conduct Authority (FCA) made confirmation of the dates that all LIBOR settings will discontinue. In response, the Financial Stability Board (FSB) has published several reports and publications supporting a “smooth transition” away from LIBOR by the end of 2021.
The FSB made recommendations for financial, non-financial sector firms and authorities to consider by publishing the following statements and reports:
- “An updated global transition roadmap that, drawing on national working group recommendations, summarizes the high-level steps firms will need to take now and over the course of 2021 to complete their transition.
- A paper reviewing overnight risk-free rates and term rates, building on the concept that the tools necessary to complete the transition are currently available. The FSB cautions market participants against waiting for the development of additional tools, in particular forward-looking term risk-free rates.
- A statement on the use of the ISDA spread adjustments in cash products, to support transition particularly in loan markets, which remains an area of concern with much new lending still linked to LIBOR.
- A statement encouraging authorities to set globally consistent expectations that regulated entities should cease the new use of LIBOR in line with the relevant timelines for that currency, regardless of where those trades are booked.”
Additional information on the FSBs recommendations for LIBOR transition is available here.
Why this matters to your credit union: The transition away from using LIBOR as an index creates legal and operational challenges for credit unions that have instruments connected to the LIBOR index. Understanding regulatory expectations help a credit union manage the transition.
Bank of Italy Governor Speaks on Financial Inclusion in Closing Address to 2021 IIF G20 Conference
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
Why this matters to your credit union: The Italian Presidency is leading the G20 Summit this year. The direction that they give to international standard setting bodies will have a tremendous impact on regulatory changes for the coming year.
Andrew T. Price, Esq.