A Single Step…
Volume 14, Number 11
November 30, 2023
Advocacy News You Can Use
The old Chinese proverb says that “a journey of a thousand miles begins with a single step”. In many respects, the changes that are coming to credit unions concerning climate-related financial risks make it feel like the regulatory upheaval is just taking its first single step and still has a thousand miles to go. The Basel Committee has issued its Principles for the Effective Management and Supervision of Climate-related Financial Risks, the International Sustainability Standards Board has finalized its disclosures—and now the Basel Committee is consulting on the disclosure of climate-related financial risks to develop a Pillar 3 disclosure framework. All of that is coupled with the Basel Committee’s reports on climate-related risk drivers and climate-related financial risks’ measurement methodologies.
In other words, the full regulatory framework for climate-related risks at the international level is coming into focus. This is in addition to the many sustainable finance related developments on many fronts with national-level authorities already moving forward in many jurisdictions with implementation of these various parts.
And so, it feels like we’re still at the first single step because the full brunt of the regulatory changes is now about to descend on credit unions. Even more troubling is that the recent consultation on the disclosures (32 pages) does not mention proportionality at all. We have a lot of work ahead of us on this journey of a thousand miles.
Basel Committee Consults on Disclosures for Climate-related Financial Risk
The Basel Committee on Banking Supervision issued a public consultation paper on a Pillar 3 disclosure framework for climate-related financial risks.
The Committee is analyzing how a Pillar 3 disclosure framework for climate-related financial risks would further its mandate to strengthen the regulation, supervision and practices of banks worldwide, with the purpose of enhancing financial stability and the potential design of such a framework. It is publishing this consultation paper to seek the views of stakeholders on its preliminary proposal for qualitative and quantitative Pillar 3 disclosure requirements that would complement the work of other standard setters, including the International Sustainability Standards Board (ISSB), and provide a common disclosure baseline for internationally active banks.
The Committee’s goal is to ensure the availability of accurate, consistent and useful climate-related data that can be used to facilitate forward-looking risk assessment by banks is available. The Committee is taking a flexible approach on the future framework, given the evolving nature of this data.
The Committee is considering which elements would be mandatory and which are subject to national discretion. More generally, the Committee notes that the development of a meaningful and robust Pillar 3 framework for climate-related financial risks is likely to be an iterative process.
A copy of the consultation can be viewed here.
Why this matters to your credit union: National-level authorities will look to these disclosures to adopt them for their respective countries. Ensuring the inclusion of proportionality and making sure the rules work for credit unions is key to obtaining right-sized regulations. This consultation process also provides key insights into the regulatory approach to climate-related risks.
FSB Report on Multifunction Crypto-Asset Intermediaries
The Financial Stability Board (FSB) recently published a report on the financial stability implications of multifunction crypto-asset intermediaries (MCIs). MCIs are individual firms or groups of affiliated firms that provide crypto-asset services, products and functions, usually around a trading platform. In many cases MCI vulnerabilities are similar to those of traditional finance. However, these vulnerabilities can be amplified by limited controls and operational transparency. MCI vulnerabilities could impact traditional financial systems through transmission channels.
The FSB will be monitoring the development of MCIs and the crypto-asset sector as a whole to determine the financial stability implications on the broader economy. Comprehensive and consistent regulations in the crypto-asset market will be critical to minimizing the vulnerabilities and impact on the overall financial stability of the market.
Why this matters to your credit union: Frameworks for the regulation continue to evolve for crypto-assets. Regulators at all levels are developing and evolving their approaches. These changes will affect how credit unions can (or cannot) provide services for based on any emerging developments.
Regulator Diversity and Inclusion Round-Up
Financial service regulators globally continue to look at the impact of diversity and inclusion within their own organization and credit unions. Regulators recognize the impact diversity and inclusion has on safety and soundness. Earlier this year, the Financial Conduct Authority (FCA) in the United Kingdom set out proposals to increase diversity and inclusion, reduce groupthink and maximize talent. The proposals noted that increase in diversity and inclusion in regulated financial services firms can produce better internal governance, decision making and risk management practices. The new rules and guidance identify that bullying and sexual harassment amongst other forms of misconduct pose a risk to a healthy firm culture.
The Central Bank of Ireland (CBI) has conducted regular reviews of large, regulated financial service providers and their diversity and inclusion progress. CBI also noted the tie between diversity and inclusion and the safety and soundness of the financial service organizations. CBI continues to conduct thematic assessments of insurance and banking firms, specifically in terms of gender representation.
This month the National Credit Union Association (NCUA) wrapped up its annual Diversity, Equity and Inclusion summit with a special focus on the internal practices of credit unions in the United States and best practices related to diversity and inclusion. NCUA also conducts an annual voluntary diversity and inclusion survey to assess the state of the industry.
Increasingly regulators are connecting the impact diversity and inclusion has in strong governance and risk management practices. Both the safety and soundness and financial inclusion mission of credit unions are impacted by its internal and external progress towards diversity and inclusion.
Why this matters to your credit union: The increasing trend by regulators in connecting diversity and inclusion to governance and risk management practices will impact how credit unions operate.
US Congressmen Question Basel Committee Rulemaking Process
A few members of the United States Congress are requesting the U.S. Government Accountability Office (GAO) examine the role U.S. federal banking agencies played in the Basel III international capital standards. Financial Services Committee Chairman Patrick McHenry and Monetary Policy Subcommittee Chairman Andy Barr are criticizing the global regulatory capital requirements and related U.S. implementation proposals.
The committee chairmen are questioning the transparency of the Basel Committee on Banking Supervision (BCBS), how the international standards were developed, and the use of those standards in the creation of the U.S. proposed capital rules. Their request for a GAO review comes after the U.S. Federal Reserve, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) jointly proposed new rules which would require significant changes to the U.S. regulatory capital regime for the largest U.S. banks by July 2025.
As national level governments continue to review and implement Basel III standards, World Council, in collaboration with its members, continues to encourage proportional and properly tailored standards for credit unions. Click here to read the joint letter from World Council and Credit Union National Association (CUNA) urging proportionality in the U.S. approach to Basel III for credit unions.
Why this matters to your credit union: This story is indicative of how national-level implementation of international standards is often caught in national-level politics leading to the inconsistent treatment of standards around the world. Also notable is that many of the regulators participate in the international standard setting process by design (often at the direction of Congress).
Andrew T. Price, Esq.