Working Together
Volume 15, Number 7
July 31, 2024
Advocacy News You Can Use
The World Credit Union Conference, which took place earlier this month, is a reminder of the strength we have as a system and a movement. Learning from each other and speaking with one collective voice to raise awareness and advocate for our cooperative system is a powerful tool. This will be more important than ever as we look ahead to the regulations that international standard setters are considering for the second half of this year. Digitalization, climate change and the rise of new financial fraud attempts are all contributing to ongoing activity from regulators and international standard setters this summer.
Continuing to engage with regulators regularly is important at every level, including local, national and international. Ensuring new guidance and regulations account for a credit union’s unique cooperative structure and purpose is important to ensure the future of our global financial system. I hope everyone is able to take the learnings and energy from the conference to write comment letters to their national regulators, share impact stories with their local government officials and exchange best practices with their neighboring credit unions. We are all stronger together.
Basel Committee Requests Comments on Principles for Sound Management of Third-Party Risk
The Basel Committee recently published a consultation on Principles for Sound Management of Third-Party Risk in the banking sector. The proposed principles are open for comment until October 9, 2024. They provide guidance to the financial institutions and supervisors regarding effective third-party risk management to withstand operational disruptions.
This consultation recognizes that continued digitalization of the financial services has led to an increased reliance on third parties for new service offerings. The Basel Committee emphasized that the increased reliance as well as the rising concentration risks requires an updated review of how these third-party risks are managed by financial institutions. There are 12 high-level principles offering guidance. They introduce the idea of a third-party life cycle while also emphasizing key concepts such as criticality.
The principles complement and expand on the Financial Stability Board’s 2023 report, Enhancing third-party risk management and oversight. While the principles are primarily directed at large international banks and their supervisors, the Basel Committee specifically noted the benefits these principles offer smaller financial institutions and their supervisory authorities. They establish a common baseline for all supervisors that oversee and evaluate the risk management of third parties.
Notably, the principles follow a technology-neutral approach. The Basel Committee believes this will allow the principles to remain relevant as new technology emerges in the future. The Basel Committee suggests these principles can be applied to third party services involved in a broad array of technology such as artificial intelligence, blockchain technology and machine learning.
Click here to read the full consultation.
Why this matters to your credit union: Many credit unions are currently using third-party providers or exploring that possibility as they look to provide banking services through technology. Cybersecurity risks, fraud, reputational risk and business continuity concerns are evolving rapidly. Regulators are taking a close look at their supervisory practices and oversight of financial institutions. To ensure continued digital advancements are possible, it is important that the guidance supervisory authorities follow is adapted to the size, risk and complexity of credit unions and not prepared solely for the risks associated with systemically important, large international banks.
FSB Reports on Regulatory and Supervisory Initiatives on Nature-Related Financial Risks
The Financial Stability Board (FSB) published a report on the status of financial authorities’ initiatives related to the identification and assessment of nature-related financial risks. It outlines current and future regulatory and supervisory initiatives. The report will be delivered to the G20 Finance Ministers and Central Bank Governors at their upcoming meeting in Rio De Janeiro. It discusses how nature degradation is a financial risk and how authorities across different jurisdictions are responding. The report shows that financial regulators are at different stages of evaluating nature-related financial risks. Many have concluded that there is a significant financial risk while others continue to monitor the situation.
Financial regulators that have analyzed the situation categorize climate-related financial risks into two categories: physical and transition risks. Their work shows that financing activities and investments have significant exposure to physical risk of climate-related incidents. While there is currently no standardized approach across jurisdictions there is a general recognition that more expertise is needed. This includes an increased level of expertise across the supervisory authorities, central banks and the private sector to address these issues and improve the data, modeling and regulatory challenges.
Click here to read the full report.
Why this matters to your credit union: This report is a helpful tool to understand the types of regulatory requirements that may apply to all financial institutions in the future. It demonstrates that while we are still lacking a common regulatory approach to climate-related financial risks, regulators are actively working to determine supervisory best practices to account for this ongoing risk.
Basel Committee Approves Disclosure Framework for Banks’ Cryptoasset Exposures
The Basel Committee recently approved a disclosure framework for financial institutions' cryptoassets. The disclosure framework has an implementation date of January 1, 2026. This framework creates a standardized set of public tables and templates covering financial institutions’ cryptoasset exposures. The disclosures are intended to enhance information for oversight and provide transparency into the risk level of a financial institution’s cryptoasset exposure. The document, DIS55 Cryptoasset exposures, sets out the final revised standard.
The Basel Committee also approved a set of targeted amendments to the cryptoasset standard. They are intended to promote a consistent understanding of the standards, especially as it relates to stablecoins. The Basel Committee intends to monitor and update the framework as the financial sector's exposure to cryptoassets develops.
While credit union exposure to cryptoassets is currently limited, this is a framework that may impact the sector in the future, as exploration of the possible benefits of cryptoassets grows. Credit unions continue to explore which innovations and review technological and investment possibilities to benefit their members. It is important for credit unions to continue to advocate for a framework that enables them to invest in emerging technology, if appropriate in the future, that does not have prohibitive regulatory barriers. WOCCU along with others requested clearer guidance on several elements including the definition of “materiality.” In response to our comments, the Basel Committee is proposing a revised definition.
Click here to access the final disclosure framework.
Why this matters to your credit union: While this new disclosure framework is only required for certain financial institutions holding cryptoassets, it is important to understand the requirements before exploring the use of this type of asset. It is also an indication of how international standards setters view the potential risk of new investment assets and provides an example of how national-level governments are considering cryptoassets as an option for their local financial institutions. Finally, it serves as a reminder to fully understand the risks of any asset and investments held on your organization’s internal portfolio.
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Erin O'Hern |