On Crisis Management…
Volume 13, Number 4
May 31, 2023
Advocacy News You Can Use
The hot topic in advocacy is what policy changes we may see as a result of the recent failures in the banking system worldwide. Watching those that implement monetary policy and those tasked with implementing regulatory policy is a never-ending sport these days. My response to whether we will see any changes as a result of the crisis is usually to refer to the old adage, “Never let a crisis go to waste”. Usually this is applied in the context of politics where politicians will take advantage of any situation in order to gain votes.
I believe the adage also applies to regulators who will not pass up a chance to make desired changes which they may not be able to otherwise enact into law. The recent failures certainly will give them cover to do this. I do think rules surrounding liquidity, capital adequacy, and asset liability management will see some adjustments in the near future. I also think there needs to be collaboration by those in charge of monetary policy with those tasked with regulations, but my guess is not much will transformation in those areas. Yes, I do think we will see changes overall, however, unlike the financial crisis of 2008, the response will be slower and hopefully a little more measured. Time will tell.
IASB to Undertake Project on Climate-Related Risks in Financial Statements
The International Accounting Standards Board (IASB) met in March to initiate its project to examine how to improve companies’ disclosures on climate-related risks. In March 2021, the IASB published a request for information on its Third Agenda Consultation, and received feedback that:
- “climate-related risks are often perceived as remote, long-term risks and may not be appropriately considered in the financial statements; and
- investors need better qualitative and quantitative information about the effect of climate-related risks on the carrying amounts of assets and liabilities reported in the financial statements.”
Some of the questions the IASB received from the open consultation included, “why companies that are expected to be affected by climate-related risks do not provide information about these effects in their financial statements; why companies that have made net zero commitments do not recognize liabilities or impair the value of their assets as a result of those commitments; and how companies should factor long-term uncertainties into the measurement of amounts in the financial statements.” The project expects to address these questions and consider any additional amendments, guidance, and educational materials that may be effective to address stakeholder concerns. The project will align with the ISSB’s (International Sustainability Standards Board) standards and will use the ISSB’s final deliberations on its initial set of standards as a guide.
More information on the IASB’s project on climate-related risks in financial statements is available here.
Why this matters to your credit union: With the Basel Committee issuing guidance on managing the risks associated with climate change, the IASB is now putting into place accounting standards to govern how this risk can be quantified from an accounting standpoint. The last step is for national-level authorities to implement these standards and credit unions will likely have to comply. This rulemaking will give us insight into what to expect.
IASB Plans to Propose Amendments to the IFRS for SMEs Standard
The International Accounting Standards Board (IASB) has plans to amend the IFRS for SMEs Standard on June 1, 2023 through publication of its Exposure Draft International Tax Reform—Pillar Two Model Rules—Proposed Amendments to the IFRS for SMEs Standard, which will be available through the Amendments to the IFRS for SMEs Accounting Standard—International Tax Reform—Pillar Two Model Rules project page and its Open for comment section.
“The IASB tentatively decided to propose amendments to the IFRS for SMEs Standard:
- to introduce a temporary exception to the requirements in Section 29 of the Standard for an entity to recognise and disclose information about deferred tax assets and liabilities related to Pillar Two income taxes;
- to make the temporary exception mandatory;
- not to specify how long the temporary exception will be in place;
- to require an entity to disclose that it has applied the temporary exception;
- to require an entity to apply these amendments immediately upon their issuance and retrospectively in accordance with Section 10 of the Standard (‘Accounting Policies, Estimates and Errors’);
- to require an entity to disclose separately its current tax expense (income) related to Pillar Two income taxes; and
- to require an entity to apply this disclosure requirement for annual reporting periods beginning on or after 1 January 2023.”
More information on the IASB proposed amendment to the IFRS for SMEs Standard for OECD tax reform is available here.
Why this matters to your credit union: IFRS for SMEs offers an avenue to obtain relief from IFRS 9/CECL expected credit loss calculations. Paying attention to these changes could mean less regulatory burden in the future.
Statistical release: BIS international banking statistics and global liquidity indicators released
The Bank for International Settlements issued its BIS locational banking statistics (LBS) on global liquidity indicators. The key findings of this report are as follows:
- Banks' cross-border claims fell by $1.4 trillion in Q4 2022, slowing the year-on-year (yoy) growth rate to 6%. Both lower bank credit (ie loans and holdings of debt securities) and a drop in the market value of banks' derivatives and other residual instruments contributed to the decline.
- Global cross-border bank credit (ie loans and holdings of debt securities) fell by $749 billion, or $400 billion on a seasonally adjusted basis. Euro-denominated credit declined by $231 billion after expanding earlier in the year.
- Cross-border bank credit to emerging market and developing economies (EMDEs) fell by $179 billion in Q4 2022 due to weaker dollar lending. Credit to the Asia-Pacific region contracted the most.
- The BIS global liquidity indicators (GLIs) show a large contraction in dollar credit to non-banks in EMDEs in Q4 2022. Dollar credit to EMDEs shrank by 4%, a rate last seen during the Great Financial Crisis of 2007–09.
Given the recent failures around the world of banks, largely as a result of aggressive action to contain inflation, watching this data may give insight into future policy on liquidity and capital in the future.
Why this matters to your credit union: This data may give us insight into the inputs standard setters are using to make adjustments to any banking or regulatory policy as a result of recent failures in the system. This could provide an indication as to potential policy changes.
Andrew T. Price, Esq.