Fasten Your Seatbelt
Volume 12, Number 4
April 27, 2022
Advocacy News You Can Use
All of us are concerned about the ongoing conflict in Ukraine. The international standard setters are no exception and are not immune to the influence of this conflict. Recently the Financial Stability Board (FSB) sent a letter to the G20 highlighting the financial effects of the Russian invasion of Ukraine. What is notable in the letter is the acceleration by the FSB on its work on crypto-assets. The FSB notes that the war has reinforced pre-existing concerns about the growth and potential illicit use of crypto-assets, and that crypto-asset markets are fast evolving and could reach a point where they represent a threat to global financial stability due to their scale, structural vulnerabilities and increasing interconnectedness with the traditional financial system.
The FSB is now moving forward at an accelerated pace in collaboration with standard-setting bodies, including FATF, to work on the regulation and supervision of ‘unbacked’ crypto-assets and ‘stablecoins’. It is also analyzing the financial stability impacts of rapidly evolving Decentralised Finance (DeFi), to help create the necessary conditions for safe innovation. This is already a part of their ongoing workplan, which was also issued earlier this year. Connected to this is the work on digital currencies for use in cross-border payments, which is also a G20 directive and being worked on by the international standard setting bodies.
All of us are trying to figure out how crypto-assets will disrupt and transform our industry. There are still many moving pieces and many uncertainties, particularly with respect to what the role of credit unions will play. What are our responsibilities what operational changes will we need to make, and how can we best serve our members with technology? Fasten your seatbelts as the answers are coming—perhaps faster than we all anticipated.
FSB Chair Drafts Letter to G20 Highlighting Financial Effects of Russian Invasion of Ukraine
On April 20, 2022, the Financial Stability Board (FSB) published a letter from its Chair, Klass Knot, to the G20 Finance Ministers and Central Bank Governors in preparation for a meeting that took place on the same day. The letter outlined the status of global financial stability as well as the FSB’s plans to address emerging vulnerabilities. The letter further discusses the effects of Russia’s invasion of Ukraine on the global financial market, including large price fluctuations and “concerns about the growth and potential use of crypto-assets.” However, these effects are far exceeded by the impact of the COVID-19 pandemic. Still, the Russian invasion is concerning as it is triggering inflation, which could promote restrictive financing. Additionally, growing vulnerabilities may begin to present themselves in a material way. These could present as things like high debt levels within the non-financial sector and stretched valuations.
Issues of particular concern include linkages between commodity markets and the financial system, including “financial system leverage and possible amplifiers in the event of market stress...and cyber risks.” Heightened geopolitical tensions and rising energy and food prices within many emerging markets and developing economies are tacked on to already existing economic stressors from the pandemic and “reduced policy space and tightening global financial conditions are also concerns. The FSB outlined actions items that include work on regulation and supervision of unbacked crypto-assets and stablecoins; increased monitoring of emerging vulnerabilities and market developments; continued work on G20 initiatives such as COVID-19 exit strategies and remedies; an upcoming report on US dollar funding and EME vulnerabilities related to external financing and ongoing policy work related to financial risks from climate change.
More information on the FSB’s letter to the G20 is available here.
Why this matters to your credit union: The Ukraine conflict is accelerating regulatory oversight in the area of crypto-assets. This will shape the credit unions’ role in participating in these emerging technologies.
Basel Committee Releases Newsletter on Third- and Fourth-Party Risk Management and Concentration Risk
The Basel Committee on Banking and Supervision released a newsletter underscoring internal discussions and outreach sessions took place to improve third- and fourth-party risk management and concentration risk to support day-to-day activities for banks and supervisors. The newsletter further highlighted concerns regarding operational risks that have emerged during the pandemic related to third-party provided technology-based services. Last month, the Basel Committee, in response to some of these issues, released Principles for Operational Resilience (POR) and revised its Principles for the Sound Management of Operational Risk (PSMOR). During the Committee’s outreach sessions with private sector participants and supervisors, it was noted that:
- “Primary gaps relating to firms' third-party risk management include a lack of clarity regarding respective bank and service provider responsibilities, insufficient monitoring of critical fourth parties, inadequate challenge or oversight from second lines of defence, and a lack of developed and tested business continuity plans.
- Banks and supervisors are concerned that a lack of complete supply chain transparency may increase operational risk. Risk-management efforts are focused on immediate suppliers, though key risks stemming from outsourcing arrangements may be driven by suppliers further down the supply chain.
- While several banks maintain formal exit strategies with respect to critical suppliers, they often lack sufficient detail and testing, and identifying the appropriate stage to execute a strategy can be unclear.
- There are a range of tools for managing operational disruptions, such as the substitutability of a third-party service provider and contracting for enhanced resilience options or service levels offered by service providers. Exit strategies designed to guide transitions that occur over longer time periods may not be as useful as other tools for curing operational disruptions.”
The full newsletter is available here.
Why this matters to your credit union: Managing third- and fourth-party risks is a continual regulatory concern for credit unions. These changes will affect your credit union’s ongoing responsibilities and requirements when dealing with outside vendors.
Financial Stability Board Publishes Work Programme for 2022
On March 31, 2022, the Financial Stability Board (FSB) published the FSB Work Programme for 2022, which outlines priorities, new initiatives, continuing items or those reaching completion, regular monitoring and reporting, and key deliverables to the G20 Indonesian Presidency. Some of the FSB’s priorities and initiatives include:
- Supporting international cooperation and coordination on current financial stability issues. This includes reinforced monitoring using the new surveillance framework in light of the Russia-Ukraine conflict and its economic impacts. Further, the FSB will follow-up “on the lessons learnt from COVID-19 for financial stability report and a report on exit strategies and effective practices for addressing the effects of COVID-19 scarring in the financial sector.”
- Enhancing the resilience of non-bank financial intermediation (NBFI).
- Enhancing cross-border payments. The FSB will implement actions under its roadmap to enhance cross-border payments and will deliver a progress report to the G20, along with “the development of key performance indicators to monitor progress towards the quantitative targets for the roadmap.”
- Harnessing the benefits of digital innovation while containing its risks. The FSB will focus on crypto-assets, such as decentralized finance (DeFi); and will continue to concentrate on enhancing operational and cyber resilience.
- Addressing financial risks from climate change. “The FSB will continue to coordinate international work through its roadmap for addressing climate-related financial risks. The FSB’s own initiatives under the roadmap will focus on building and strengthening the analytical basis for monitoring climate-related risks to financial stability; identifying regulatory and supervisory approaches to address climate-related financial risks; and taking stock of progress in the implementation of the roadmap.”
More information on the FSB’s 2022 workplan is available here.
Why this matters to your credit union: The FSB’s workplan highlights the many issues that will undergo regulatory changes over the next several years. Paying attention to these issues will help prepare your credit union for regulatory changes.
European Council’s Position on European Green Bonds Proposal is Greenlighted
The European Council’s position on a proposal to create regulation supporting European Green Bonds was given the go ahead by EU permanent representatives as part of the EU’s objective to “implement its strategy on financing sustainable growth and the transition to a climate-neutral, resource-efficient economy.” The next steps involve negotiations with Parliament to establish a final version of the text. Issuers of the European Green Bond (EuGB), which are environmentally sustainable bonds, will be subject to uniform requirements when issuing these bonds to investors within the European Union. The regulation will further establish a registration system and supervisory framework for EU green bonds that are reviewed outside of the Union.
More information on the Council's proposal for European Green Bonds is available here.
Why this matters to your credit union: Green Bonds are becoming more commonplace as a means for investment in sustainable growth. Regulators are increasingly looking to these instruments as requirements for financial institutions.
Andrew T. Price, Esq.