On New Year’s Resolutions
Volume 13, Number 1
January 25, 2023
Advocacy News You Can Use
Many of us make resolutions at the beginning of the New Year. We hope these resolutions will bring about some change in our behavior, lifestyle, or habits that will benefit us in the long run. One commentator mentioned that the best New Year’s resolutions are really evolutions and not resolutions. That is what I hope takes place with the international standard setting bodies.
Let me explain. The G20 is embracing financial inclusion and specifically the need to have enabling and proportional regulatory frameworks that help increase financial inclusion. The Basel Committee has endorsed proportionality, including issuing specific guidance last year and more recently issuing a document finding that complexity in regulations is decreasing competition and exacerbating the too-big-to-fail problem. The Financial Action Task Force is likewise issuing guidance finding that the failure to implement proportionality is leading to financial exclusion.
The nexus between properly tailored and right-sized regulations for credit unions is now clearly established. This is great news for credit unions, but what is really needed is the evolutionary step of having the international standard setters work with and encourage national-level supervisors to do the hard work on tailoring the rules. When our industry gets to that point, credit unions will have an environment that provides for their growth in a safe and sound manner, and allows our unique credit union cooperative model to function at its best.
I encourage you to read the recently released WOCCU Global Regulatory Update that will walk you through these developments.
WOCCU International Advocacy releases 2023 Global Regulatory Update
The ability of credit unions to weather financial shocks draws consumers to them during times of crises—something regulators must recognize and allow to help the world recover from the current climate of economic uncertainty. That’s the theme of World Council of Credit Unions’ (WOCCU) 2023 Global Regulatory Update, which stresses how important it is for WOCCU and other credit union associations around the globe to articulate this dynamic to policymakers during what promises to be a difficult year ahead.
“International standard setters are beginning to understand the critical role that credit unions play in providing responsible and affordable financial services. This is a key driver for inclusive and resilient growth around the world. Shaping the regulatory frameworks that help maximize this potential will allow credit unions to be the catalyst for rebuilding coming out of the pandemic and throughout an anticipated global recession,” said Andrew Price, World Council Senior VP of Advocacy and General Counsel.
Price and Panya Monford, WOCCU Assistant General Counsel of Advocacy, co-authored this year’s report.
World Council’s Global Regulatory Update is put out on an annual basis to help credit unions and financial cooperatives prepare for the compliance issues most likely to impact them in the year ahead. The new edition also covers several other leading regulatory issues affecting credit unions across the globe, including:
- The G20 and Financial Inclusion;
- Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT);
- Sustainable Finance and Climate Change;
- Cybersecurity and Digitization.
You can read World Council’s 2023 Global Regulatory Update in its entirety by clicking here.
Why this matters to your credit union: The emerging issues at the international standard setting level will result in new or revised regulations at the national level. Understanding these emerging issues will help your credit union prepare for regulatory changes.
Basel Report Documents Complexity of Basel III Reforms
The Basel Committee on Banking Supervision issued its Evaluation of the impact and efficacy of the Basel III reforms, noting that the more sophisticated and multi-dimensional framework introduced through Basel III to address a variety of risks to enhance bank resilience came at the cost of greater regulatory complexity. With respect to this complexity, the report notes a position that has been consistently argued by the World Council that “complex rules applied to simple banking activities may limit competition, giving advantages to larger and more complex banks, potentially providing incentives for banks to become even more complex and aggravating the [too big to fail] problem.”
World Council stated on numerous occasions to the Basel Committee that compliance with overly complex regulations disproportionately affects credit unions as compared to larger, more complex financial institutions. Their findings note that there are several drawbacks to a complex regulatory framework, including challenges to capital planning, and could lead to spurious risk assessments and a misallocation of capital.
These findings should now be of use to national level-regulators when implementing the Basel III framework, who should take a proportional approach to regulations for credit unions consistent with the proportionality built into the Basel III framework and consistent with other guidance issued by the Basel Committee.
Additionally, the report provides a holistic evaluation of the impact and efficacy of the implemented Basel III reforms assessing whether they have met their intended objectives of increasing bank resilience and reducing systemic risk. It also examines some potential unintended effects, notably on bank lending and capital costs. This report specifically provides evidence on the following:
- the impact of the capital and liquidity reforms on bank resilience and systemic risk;
- potential side effects on bank lending and capital costs; and
- interactions among elements of the reforms and the regulatory complexity within the Basel Framework.
A copy of the report can be viewed here.
Why this matters to your credit union: The acknowledgment by the Basel Committee on the impact of complex regulatory frameworks for smaller, community-based financial institutions, such as credit unions, is key to establishing the need for proportionality. This will help with articulating the importance to national-level regulators on tailoring regulations for the size, risk and complexity of credit unions and will ultimately help grow the credit union system worldwide.
BIS Bulletin Addresses Risks in Cryptocurrencies
The Bank for International Settlements issued its Bulletin entitled Addressing the risks in crypto: laying out the options to address the recent failures involving several major crypto firms. This issue has become increasingly pressing as these emerging markets are going through booms and busts. While they have not yet threatened financial stability, the scale and prominence of these recent failures highlight the need to address the risks before crypto markets can evolve into systemic contagions.
The reports key takeaways are as follows:
- The recent high-profile failures of FTX and other crypto firms have reignited the debate on the appropriate policy response to address the risks in crypto, including through regulation;
- The "shadow financial" functions enabled by crypto markets share many of the vulnerabilities of traditional finance. These risks are exacerbated by specific features of crypto;
- Authorities may consider different – not mutually exclusive – lines of action to tackle the risks in crypto. These include containment or regulation of the crypto sector or an outright ban; and
- Central banks and public authorities could also work to make TradFi more attractive. A key option is to encourage sound innovation with central bank digital currencies (CBDCs).
A copy of the report can be viewed here.
Why this matters to your credit union: Regulation of cryptoassets is emerging quickly and regulators are grappling with the appropriate approach for banks and credit unions. The approaches recommended in this document will shape the regulations for credit unions in the future. It is worth noting the uncertainty of a clear path on cryptoasset regulations.
Andrew T. Price, Esq.