Will It Ever End?
Volume 13, Number 9
October 25, 2023
Advocacy News You Can Use
This is one of those months in Advocacy where everything seems to happen at once. Sometimes you want to throw up your hands and give up because the regulatory changes never seem to end. The Basel III framework was finalized by the Basel Committee almost 5 years ago. Although many countries are going through the process now of adopting the final pieces of the consolidated framework, many of us hoped the Basel Committee would slow down. This month has us wondering, will it ever end?
The Basel Committee closed its consultation on the Core Principles of Effective Banking Supervision (yes, proportionality is included) by adopting significant changes, including the incorporation of climate risk principles and cybersecurity principles. The Committee also opened consultation on cryptoasset disclosures and issued a report on the 2023 banking turmoil—signaling further changes to various issues including liquidity and supervision. The Financial Stability Board issued a progress report on climate related disclosures which goes along with the International Sustainability Board’s roadshow on providing technical assistance around the world on implementing their new standards. There are others as well.
We all realize that change is inevitable, and the regulatory frameworks need to change to address emerging technology and emerging risks, and, more importantly, to provide proportionality. But there is something to be said about regulatory certainty that allows a financial institution, particularly smaller, community-based financial institutions, to be able to make decisions and to invest in their systems and their people. One has to wonder—is the pace of change getting in the way of our credit unions being allowed to serve their members? We may never know the answer, but our only choice is to keep fighting for our members, whatever is thrown our way.
World Council Urges Basel Committee to Limit Regulatory Burden on Credit Unions
World Council submitted a comment letter last week on the Basel Committee’s proposed updates to the Core Principles for Effective Banking Supervision (Core Principles). The Core Principles are global standards for prudential regulation and supervision. Supervisory authorities across the globe use the Core Principles as a benchmark for evaluating the effectiveness of their regulatory and supervisory frameworks. This is the first formal update to the Core Principles since 2012.
In the comment letter, World Council strongly urged the Basel Committee to include more direct language concerning proportionality and communication with national level supervisory authorities. We also highlighted the ongoing challenges of accessing quality correspondent banking services and the disproportionate burden recent guidance on operational resilience, climate, digitization and stress testing will have on credit unions.
World Council has long advocated for clearer language regarding proportional implementation of international standards. It is critical that laws and regulations designed to address the largest international banks that pose the greatest risks to the financial markets are appropriately tailored for credit unions serving their local community. While the World Council requested several additions and adjustments to the Core Principles, we are pleased that the Basel Committee’s proposed revisions include several updates favorable to credit unions recognizing proportionality.
A copy of the letter can be viewed here.
Why this matters to your credit union: The Core Principles outline many elements for an effective supervision framework. The changes in these standards will encourage national-level supervisors to change their current practices. Ensuring proportionality is adequately contemplated will help ensure that a framework designed for large, internationally-active banks can be appropriately designed for smaller, community-based financial institutions like credit unions.
Basel Committee Discusses Banking Vulnerabilities, Climate and Cryptoasset Disclosures
The Basel Committee on Banking Supervision met in October to evaluate recent market developments and risks to the global banking system. The Committee also discussed several policy and supervisory initiatives.
The Committee reviewed the outlook for the global banking system given the March 2023 banking turmoil and high interest rate environment. The banking challenges that occurred this Spring were the most significant system-wide stress on the banking industry since the Great Financial Crisis. The Committee reflected on the causes of the banking turmoil and the regulatory and supervisory lessons learned in its October 2023 report. Based on this report, which the Group of Governors and Heads of Supervision recently reaffirmed, the Committee will be pursuing several initiatives. These include:
- Prioritising work to strengthen the supervisory effectiveness and areas that need additional global guidance; and
- Pursuing additional follow-up analytical work to assess whether specific standards of the Basel Framework produced the intended result during the March 2023 banking turmoil (especially related to liquidity and interest rate risk).
In addition to reflecting on this year’s banking challenges and future adjustments, the Committee discussed both climate risks and cryptoasset exposure. The Committee agreed to consult on a Pillar 3 disclosure framework for bank exposures to climate-related financial risks. The Committee will be publishing a consultation paper on this topic by November. The Committee also agreed to consult on disclosure requirements regarding banks’ cryptoasset exposures. These new disclosures would complement the previous standards issued by the Committee in December 2022. The consultation paper on cryptoassets is expected soon.
Finally, members of the Committee also discussed how advances in digitalisation and financial technology are impacting the financial system. Trends discussed included the provision of banking services through non-bank intermediaries (“Banking as a Service”). The Committee expects to publish a report in 2024 on developments in digitalisation of finance and their implications for banks and supervisors.
Why this matters to your credit union: Paying attention to the Basel Committee workplan gives our industry advance notice on potential regulatory changes. Climate risks, cryptoassets, and the adoption of the Basel III framework continue to be significant focus areas for the Basel Committee.
Basel Committee Oversight Body Focuses on Learnings from Banking Turmoil
The Group of Central Bank Governors and Heads of Supervision (GHOS), which oversees the Basel Committee on Banking Supervision, met in September to discuss lessons learned from recent banking challenges and review the implementation status of outstanding Basel III standards.
The Spring’s individual bank failures and turmoil resulted in Basel Committee initiatives such as strengthening supervisory effectiveness, pursuing additional analytical work, and assessing the need to explore policy options. GHOS endorsed Basel Committee’s response to the events this Spring.
The GHOS will be publishing the Basel Committee’s regulatory and supervisory lessons learned from the recent stress in the financial services industry. They include:
- The banks’ risk management practice and governance arrangements are the most important foundation to operational resilience.
- Strong supervision plays a vital role in overseeing the safety and soundness of banks. Effective supervision must act early to identify weaknesses in bank practices.
- The importance of a prudent regulatory framework in safeguarding financial stability.
The GHOS is supporting a series of follow up initiatives. They include strengthening supervisory effectiveness and identifying issues that could merit additional guidance at a global level and follow-up analytical work to determine if components of the Basel Framework are performing as intended.
The GHOS noted that members continue to make progress in implementing the Basel III reforms, which were finalized 2017. All remaining jurisdictions and standards of Basel III are expected to be implemented by the end of 2025.
Additional information can be found here.
Why this matters to your credit union: This stocktake of the 2023 bank failures point to potential future regulatory changes, including revisions to liquidity management and other adjustments to supervisory approaches. This could impact a credit union’s operations in the future.
Andrew T. Price, Esq.