A Balancing Act
Volume 13, Number 2
February 22, 2023
Advocacy News You Can Use
The Financial Stability Board recently released its 2023 work priorities. It is no real surprise that it includes issues such as crypto-assets, cross-border payments, cyber and operational resilience and addressing climate-related financial risks. For a trade association looking at how to approach these issues from an advocacy standpoint, it always presents a challenge on striking the right balance between the short-term interests of the industry and the longer-term health and well-being of the industry.
I am reminded by the experience in the United States in relation to the history of anti-money laundering (AML or BSA in the U.S. regulations), where the California Bankers Association challenged BSA regulations in the early 1970’s on constitutional grounds, seeking to reduce regulatory burden for their member banks. That led to a 1976 Supreme Court ruling that found BSA gives law enforcement (and regulators) permission to access customer bank records. This ultimately gave regulators carte-blanche to create the modern framework for BSA compliance, including Suspicious Activities Reports in 1996 and the expansion of the Patriot Act in 2001 (among other significant events).
It is not my point that BSA and AML regulations are not necessary. They are. Our industry has a role to monitor, report and not facilitate bad acts. Riggs Bank’s laundering of the dictator Augusto Pinochet’s money tells us our lesson in that regard. But, had the industry taken an active role in shaping appropriate regulations as opposed to an outright attack, a regulatory framework could have been created that was more efficient, with regulatory burden tailored appropriately. An embrace of good public policy goals that consist of preventing money laundering while defining the proper way to achieve those goals for our industry is likely the advocacy lesson from that 1976 approach.
As I look at the objectives of addressing climate change and sustainable finance, it is evident that there is significant regulatory burden emerging for credit unions. The challenge will be to have a balancing act of embracing the excellent public policy goals of addressing climate change that all of society needs to embrace for the well-being of humanity, but also amplifying the important role that credit unions can play in sustainable finance by noting our cooperative model, the social benefits that we bring, and the positive impact our products and services can have on the lives of our members. If we get the balancing act right, the regulatory burden just may be a boon.
FSB Publishes Letter to G20 on 2023 Work Priorities
The Financial Stability Board (FSB) released its letter from Chair Klaas Knot to the G20 Finance Ministers and Central Bank Governors outlining its 2023 work, including its objective “to monitor and address these vulnerabilities”. The letter also includes three reports covering non-bank financial intermediation (NBFI), crypto-assets and decentralized finance, and cross border payments. The FSB believes caution should be exercised when evaluating the current global economy due to “record-high” debt levels, “rising debt service costs and stretched asset valuations in some key markets". Further, the FSB plans to enhance cyber and operational resilience and will provide a revised report on cyber incident reporting. They will also work on enhancing disclosures, data and climate-related vulnerability analysis to address climate-related financial risks.
The key elements of the FSB's reports include:
- Non-bank financial intermediation: The Financial Stability Aspects of Commodity Markets report concentrates on vulnerabilities within the non-bank sector, specifically in the physical and derivatives commodities markets.
- Crypto-assets and decentralized finance: The report on The Financial Stability Risks of Decentralised Finance (DeFi) highlights vulnerabilities in DeFi systems and refers to policy recommendations to address the risks associated with DeFi, as well as data gaps for risk monitoring.
- Cross-border payments: The FSB will publish a report regarding the implementation of the G20 Roadmap to enhance cross-border payments. Two task forces will be formed “to strengthen private sector participation in taking the Roadmap forward.”
More information on the FSB’s work plans for 2023 are available here.
Why this matters to your credit union: The Financial Stability’s work plan shows us the emerging issues that will see regulatory changes in the near future. Issues such as payments, cryto-assets and sustainable finance will directly impact the credit union regulatory framework. .
Commission Announces Platform on Sustainable Finance Members
On February 8, 2023, the European Commission announced its members for the new mandate of the Platform on Sustainable Finance via a published list. The Platform on Sustainable Finance is an advisory body that is “subject to the Commission’s horizontal rules for expert groups”, and will advise the Commission on the implementation and usability of the EU taxonomy with three leading deliverables, including:
- “advising on the usability of the EU taxonomy and wider sustainable finance framework.
- advising on the technical screening criteria for the EU taxonomy.
- monitoring capital flows into sustainable investments”.
The Platform consists of 28 members, five observers with environmental and sustainable finance expertise reigning from the private sector, seven directly re-appointed permanent members stemming from EU agencies and bodies, nine EU institutions and international organization sitting as observers, and Helena Viñes Fiestas as appointed Chair (inter alia Commissioner of the Spanish Financial Markets Authority and a member of the UN High-Level Expert Group on Net Zero Pledges).
Why this matters to your credit union: The European Union is leading the world forward in sustainable finance regulations with the adoption of a taxonomy and now the sustainable finance disclosure regulation. Their approach will likely be used as a model for other jurisdictions looking to adopt sustainable finance regulations.
Aligning Operating Hours Across Jurisdictions Could Improve Cross-Border Payments
The Bank for International Settlements (BIS), Committee on Payments and Market Infrastructures (CPMI) released a report, Operational and technical considerations for extending and aligning payment system operating hours for cross-border payments: An analytical framework, to aid central banks and operators who plan to extend real-time gross settlement (RTGS) system operating hours with a systemic approach to render these services effectively. The report works in conjunction with the BIS May 2022 report, Extending and aligning payment system operating hours for cross-border payments. According to the report, “An extension and alignment of payment system operating hours across jurisdictions could help to speed up cross-border payments, especially between jurisdictions with significant time zone differences. It could also improve liquidity management, reduce settlement risk and enhance the performance of cross-border payment arrangements.”
While the 2022 report focused on three options for extending RTGS system operating hours to enhance for cross-border payments, including incremental increases in operating hours on current operating days, inclusion of current non-operating days and extension to 24/7 operating hours, the 2023 report gives attention to current operating days as a short-term strategy. Medium- and long-term strategies are still under consideration.
More information on BIS’ report on Operational and technical considerations for extending and aligning payment system operating hours for cross-border payments: An analytical framework, is available here.
Why this matters to your credit union: Reforms to cross-border payments are a major focus of the G20 and the international standard setting bodies. Their work will have a profound effect on payments and how credit unions will access and be able to provide services to their members. These proposals show key developments on these changes.
Andrew T. Price, Esq.