A Storm is Coming
Volume 12, Number 2
February 23, 2022
Advocacy News You Can Use
Climate change is a serious issue and many of us want to do our part to address it. Credit unions want to prepare themselves to be resilient to the physical and transitional risks. With improved data and climate-risk economic analysis available today, regulators can no longer ignore the connection between climate change and the financial system. Regulators have a number of policy levers at their disposal that they can use to mitigate these risks. The policy debates over the right combination of these levers are now front and center among the international community and the international standard setting bodies.
This position is now evident in the most recent consultation by the Basel Committee on Banking Supervision in Principles for the Effective Management and Supervision of Climate Related Financial Risks. The Basel Committee really pulled every policy lever possible to address climate change in this document. The principles call for requirements addressing climate-related risks, including an 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. Analyzing each of these, it is easy to see that a regulatory storm is coming. The key here is to secure a proportional approach that works for credit unions. The Basel Committee needs to explicitly recognize proportionality in these principles, or the storm of financial exclusion will only get larger.
WOCCU Urges Proportionality in Climate Principles
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 transitional 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 an 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.
Why this matters to your credit union: These principles could lead to numerous additional regulatory requirements for credit unions. If not properly tailored, credit unions will face costly and burdensome regulations that may affect their ability to serve members.
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.
Why this matters to your credit union: This demonstrates that the full implementation of the Basel III framework is still underway around the world. Credit unions may become subject to many of the requirements and approaches contained in this framework without proportional tailoring (included in the framework), even though the provisions are designed for larger internationally active banks.
FSB Chair Publishes Letter to the G20 Regarding 2022 Deliverables
In advance of a meeting set for February 17-18 , 2022, the Financial Stability Board (FSB) published a letter from its 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, 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’s letter to the G20 and Central Bank Governors is available here.
Why this matters to your credit union: This letter outlines the priorities for the Financial Stability Board and sheds light on which regulations will see additions or changes in the upcoming year. Paying attention to these issues will help a credit union prepare for these changes.
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.
Why this matters to your credit union: Risks from crypto-assets are a new and emerging issue. The focus by the Financial Stability Board shows the significant concern and attention by international standard setting bodies and will likely result in regulation moving forward.
Andrew T. Price, Esq.