Volume 12, Number 7
August 30, 2022
Advocacy News You Can Use
Listen Up! This is what my elementary school teacher used to tell me to try and get me to pay attention in class. I feel like I need to shout “Listen Up” to our credit union movement based on the recent progress report issued by the Financial Stability Board (FSB). In its report to the G20 on its progress on the Roadmap for Addressing Financial Risks from Climate Change, the FSB mentions regulatory changes that may come as a substantial surprise to many in the industry, as regulators look to embed climate-related risk into risk management and prudential regulatory frameworks.
Everything from increased reporting to enhanced data analytics, as well as enhanced scenario analyses and stress testing, and increased supervisory resources are being contemplated to address the effects of climate change on the financial services sector. The role of supervisory oversight is being developed as we speak and the management of climate-related risks will need to flow down to decision-making on frontline business functions of financial institutions. This will mean a significant change, cost, expense and regulatory burden for credit unions. The standard setting bodies are now telling us where they are headed. We all need to “listen up” and engage, so that we are not swallowed up by requirements designed for the large banks. Proportionality…
FSB Issues Progress Report on Climate Roadmap
The FSB Roadmap for Addressing Financial Risks from Climate Change: 2022 progress report notes that policy action to address such risks is more urgent than ever. The report outlines the increased frequency and intensity of extreme weather and climate-related events, and the intense debate about current and future energy policies in many jurisdictions. It also highlights that financial risks related to climate change, including transition risks, are not just a long-term issue or tail event.
Effective action continues to rest on strong international coordination. The G20 has asked the FSB to deliver in July 2022 the first of its annual progress reports on the Roadmap. The report summaries the progress across all four blocks of the Roadmap:
- Firm-level disclosures.
- Vulnerabilities analysis.
- Regulatory and supervisory practices and tools.
This progress report was prepared in consultation with standard-setting bodies and other relevant international bodies and serves as input into broader international policy considerations, such as at the G20, G7 and UN, as well as to the work under the G20 Sustainable Finance Working Group (SFWG) roadmap on sustainable finance.
A copy of the report can be viewed here.
Why this matters to your credit union: This release outlines the direction of international standards setters for providing requirements as they relate to managing climate-related risks. This will ultimately change the regulatory burdens for credit unions.
FSI Issues Insights on Supervisory Practices for Assessing Sustainability
The Financial Stability Institute (FSI) of the Bank for International Settlements (BIS) issued its Financial Stability Insights report on the supervisory practices for assessing the sustainability of banks’ business models.
The report finds that banks rarely become weak overnight, and flaws in business models and strategies are often the root causes of banks' vulnerabilities and failures. While sudden shocks may be the immediate cause of , the root causes are generally more structural. If not identified in time and allowed to fester, these vulnerabilities will make a bank's activities increasingly unsustainable, to the point where it becomes non-viable.
The report notes that business model analysis (BMA) is a key component of supervisory frameworks that allows supervisors to identify banks' vulnerabilities at an early stage and helps to ensure their safety and soundness. Where the analysis identifies existing or potential vulnerabilities, the assessment may provide grounds for early supervisory interventions. Therefore, BMA has the potential to enhance bank supervision and make it more effective, proactive and forward-looking.
The paper presents a range of supervisory practices regarding BMAs. In particular, it aims to identify practices that might be relevant to authorities seeking to explicitly introduce BMA in their supervisory review process (SRP). In order to do so, the paper emphasizes practical aspects of BMA, including processes and procedures for developing and conducting a BMA, as well as for integrating its outcomes into the overall SRP.
A copy of the report can be viewed here.
Why this matters to your credit union: This gives insight into potential approaches that a supervisory authority may take with a credit union, noting the focus on advanced monitoring and the business plan, in addition to traditional financial metrics.
FSB Issues Letter to G20 Finance Ministers
The Financial Stability Board (FSB) issued its letter to the G20 which is meeting during a time of growing financial stability challenges. The G20 will have its Leaders’ Summit in Indonesia in November.
The letter flags that the combination of lower growth, rising inflation and tighter global financial conditions may crystalize pre-existing vulnerabilities in the global financial system or give rise to new ones. In particular: rising indebtedness across countries, non-financial corporates and households; liquidity mismatches in non-bank financial intermediation; and tightening financial conditions affecting Emerging Markets and Developing Economies (EMDEs). The letter stresses that with the exit from COVID-19 well underway, it is important to rebuild macroprudential policy space whenever national conditions allow.
The letter outlines risks from commodity markets and notes that the FSB is analyzing financial issues in commodity markets and closely monitoring the possible spillovers from commodities markets into the broader global financial system as part of its ongoing surveillance.
The letter provides an overview of two areas of the FSB’s work, for which documents have been submitted to the G20: addressing scarring and exit strategies from COVID-19; and progress under the FSB’s climate roadmap. The letter also provides an update on the FSB’s work on crypto-assets, following the issuance of a public statement on this topic.
A copy of the letter can be viewed here.
Why this matters to your credit union: The letter to the G20 by the Financial Stability Board indicates those issues that are at the forefront of the FSB’s regulatory agenda. This provides us insight into those topics that will be a focus during examinations or upcoming rulemakings.
Andrew T. Price, Esq.