Weekly Global Regulator & Central Bank News Roundup

June 26-July 3 2022

PRUDENTIAL & FINANCIAL STABILITY

EBA confirms strong capital and liquidity position of banks while highlighting slight deterioration in asset quality in latest risk dashboard
The European Banking Authority (EBA) has published its latest quarterly risk dashboard with data as of the end of Q1 2022. Findings are mixed:

• While the capital position of banks remained strong, a minor decrease in the CET1 ratio from 15.5% to 15% was recorded, largely driven by an increase in RWAs
• Average asset quality continues to improve with a light decrease of the NPL ratio from 2% to 1.9%, however stage 2 loans continued to increase and the asset quality of loans under existing measures remains a concern too
• Increasing interest rates in response to inflation could further translate a negative impact on asset quality
• Banks benefit from strong liquidity with the ratio remaining higher than pre-pandemic level
• Return on equity declined by 0.7% to 6.6%
• Market risk remains elevated owing to the rise in interest rates, increased asset prices, FX volatility and credit spreads — additional asset price corrections in the near future are possible
• Cyber and operational risks remain a concern amid the geopolitical tensions, yet to date no material successful cyber-risk incident has materialized

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European Systemic Risk Board highlights marked increase in financial stability risk
Concurrently with the release of the European Banking Authority’s latest risk dashboard, the General Board of the European Systemic Risk Board has held its latest meeting, concluding that financial stability risks have seen a marked increase amid the current amid the current economic environment. Key concerns highlighted by the Board include the following:

• The current environment gives rise to elevated uncertainty and the possible materialization of tail risk scenarios
• If materialized, the tail risk scenarios could lead to renewed balance sheet stress for households and firms, whereby stresses in the corporate sector could translate into a negative impact on asset quality and profitability in the EU banking sector
• There remains the risk of an abrupt and broad-based fall in asset prices, which in turn could result in losses, substantial redemption requests and liquidity strains for some investment funds
• The outlook on residential real estate markets remains mixed, with the continued observed strong house price growth and expansion of mortgage lending and the possible impact of increasing lending rates on households’ debt servicing capacity remaining a concern that may however be mitigated by several factors including low unemployment and available household savings
• There remains a risk of potential sudden financial stability implications from crypto-based products and decentralized finance if the rapid growth trend continued

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CONDUCT & CONSUMER PROTECTION

IAIS publishes report on supervisors’ use of key indicators to assess insurer conduct
In furtherance of its efforts on conduct and culture, the International Association of Insurance Supervisors (IAIS) has published a new report on supervisors’ use of key indicators to assess insurer conduct. The report draws on insights from a survey carried out by the IAIS’ Market Conduct Working Group among 51 authorities between December 2020 and February 2021. Some of the key trends highlighted in the survey include the following:

• Across the 51 participating authorities, 201 unique conduct indicators were identified
• When clustered into focus areas, indicators relating to “claims” and “persistency, renewals and alterations” represent the most dominant groups
• When classified by conduct outcome, the top three categories include “appropriateness of product”, “customer value” and “mis-selling” with many indicators serving a multi-purpose and aiding in the assessment of different conduct outcomes

In addition, surveyed authorities reported five key challenges in supervising insurer conduct as follows:

• Poor prioritization of conduct-related issues by insurers
• Lack of supervisory resources
• Poor data quality
• Perception of high compliance/administrative burden by insurers
• Poor understanding of conduct by insurers

The survey further revealed that there remain marked differences in the sophistication of data collection and assessment methods by authorities as well as limited adoption of supporting suptech solutions to date.

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FINANCIAL LITERACY & INCLUSION

World Bank publishes 2021 edition of its Global Financial Inclusion Index
The World Bank has published its much-anticipated update to its Global Financial Inclusion Database. The database houses the most comprehensive dataset on financial inclusion covering 300+ financial inclusion indicators from across 140+ countries. Indicators address both the access to financial services and the use of financial services through digital payments, savings and borrowings. This is the 4th update since the launch in 2011 and the latest one since 2017.

As per the latest figures, there remain 1.4 billion people financially excluded, with now 76% having an account at a bank or regulated institution. This compares to 1.7 billion and 68% in 2017. The latest figures point towards a further significant decrease in the financial inclusion gender gap, which is down from 9% to 6% across developing economies and to 4% globally. Across regions, Middle East and North Africa continue to show the lowest account ownership at below 50%.

Of the 1.4 billion unbanked, 50% are concentrated in only 7 jurisdictions with India, China, Pakistan and Indonesia ranking at the top. In terms of the use of financial services, most prominently there has been a further stark growth in the use of digital payments. In developing economies nearly 80% of all account owners made or received at least one digital payment and many new account owners opened an account for the specific purpose of receiving a wage payment or money from government.

Overall, the adoption of mobile money accounts has shown to be a key driver for the increase in account ownership, notably across Africa. Key barriers to financial inclusion have not significantly shifted with lack of money, perceived cost of accounts, and distance to financial institutions remaining top reasons, in addition to other drivers such as lack of documentation and lack of trust. As documented by other studies before, the global pandemic contributed to the accelerated adoption of digital payments.

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AML & CFT

New FATF President lays out priorities under Singapore’s FATF Presidency
At the end of June Germany’s FATF presidency has come to an end. As of July, Singapore has taken over the presidency for the period 2022–2024 under leadership of the new FATF President T. Raja Kumar. In his new note, he has now formalized the four priorities for the coming two years as follows:

• Strengthening of asset recovery through the development of stronger operational systems for asset recovery including improved collaboration with FATF members and other partners such as the United Nations, IMF and INTERPOL
• Countering illicit finance of cyber-enabled crime by developing a deeper understanding of the money laundering techniques used to finance cyber-enabled fraud and scams and identifying appropriate tools including data analytics and industry partnerships for counteraction
• Increasing effectiveness of global AML measures including through continued optimization of the FATF standards and advancements in strategic areas such as virtual assets and their service providers, illegal wildlife trade and environmental crime and the adoption of data analytics to support money laundering and terrorist financing supervision
• Reinforcement of FATF Partnerships with FATF-style regional bodies (FSRBs) including through continued capability and capacity building of FSRBs and by deepening the strategic collaboration

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FATF publishes targeted update on the implementation of its standards on virtual assets and service providers
The FATF has published a further update on the status of implementation of its standards on virtual assets and virtual asset service providers. This constitutes the third update since the introduction of the standards in 2019. At the center of the update is the implementation of FATF’s Travel Rule. Its assessment finds that there remain significant shortcomings in the implementation of the rule, with only few countries having passed applicable legislation so far and even fewer having commenced supervision and enforcement measures. Particular challenges identified include the implementation of the Rule in a cross-border context as a result of different implementation approaches and/or in circumstances where one country does not yet regulate virtual assets and its service providers. Besides the Travel Rule, the report also discusses money laundering and terrorist financing implications in the context of DeFi, NFTs and other key market developments.

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FINTECH, DIGITAL ASSETS & ECOSYSTEM INNOVATION

BIS releases second consultation on the prudential treatment of banks’ cryptoasset exposures
The Bank for International Settlements has released the second consultation on the prudential treat of banks’ crypto-asset exposures. Under the updated proposal, key elements of the first consultation are preserved. This includes the division of cryptoassets into two main groups.

Group 1 cryptoassets

Group 1 cryptoassets include tokenised traditional assets and cryptoassets with effective stabilisation mechanisms (stablecoins). The be recognized under Group 1, these must pass a classification test based on a set of prescribed conditions. For stablecoins that also includes newly proposed redemption and basis risk tests, the objectives of which are to ensure that the reserve assets are sufficient to enable the cryptoassets to be redeemable at all times and that the holder of a cryptoasset can sell it in the market for an amount that closely tracks the peg value. Group 1 assets would be subject to at least equivalent risk-based capital requirements based on the risk weights of underlying exposures as set out in the existing Basel capital framework. Additionally, under the refined proposal, all Group 1 assets would be subject to an add-on to risk-weighted assets to cover infrastructure risk. Stablecoins that only pass the risk narrowly, would further need to apply a capital add-on.

Group 2 cryptoassets

Group 2 includes the higher-risk unbacked crypto-assets and stablecoins with ineffective stabilization mechanisms. Consistent with the original proposal, as a baseline they would be subject to a 1250% risk weight. However, the amended proposal introduces the option for hedging to be recognized in accordance to defined hedging recognition criteria. If passed, this would result in a less conservative treatment based on a modified versions of the Simplified Standardised Approach or the Standardised Approach to market risk.

The consultation is open until end of September, with the final standards planned to be finalized by year-end.

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European Parliament reaches agreement on the markets in cryptoassets (MiCA) proposal
The European Parliament has announced that it has reached a provisional agreement with the Council presidency on the markets in cryptoassets (MiCA) proposal, highlighting in the announcement that “this landmark regulation will put an end to the crypto wild west”. Under the proposal, crypto-asset service providers will need to obtain an authorization from national authorities to operate within the EU and abide by new consumer protection requirements such as the protection of consumer wallets and liability in the event of investors’ loss of crypto-assets. As for stablecoins, the proposal mandates issuers to hold a 1/1 reserve which is partially composed of deposits and to grant stablecoin holders a claim at any time and free of charge. Beyond this, the proposal also foresees that crypto-asset market participants will need to declare information on their environmental and climate footprint. While NFTs are currently not in scope, a deep dive assessment is planned to determine their potential regulatory treatment.

Besides the agreement on MiCA, the European Parliament also finalized new crypto travel rules to strengthen the prevention of money laundering and terrorist financing. The new rules requires that information on the source of the crypto asset and its beneficiary travels with the transaction and is stored on both sides of the transfer and can be provided to competent authorities on request. Importantly, the final rules abandoned a minimum threshold or exemptions for low-value transfers from this requirement.

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PAYMENTS & CURRENCY

Meta announces official end of the pilot of its digital wallet Novi
Meta has formally announced the end of the pilot of its digital wallet Novi as per this September. The announcement comes just a few months after the official end of Meta’s Diem Project in response to regulatory challenges faced. Novi was created with the objective to support financial inclusion by facilitating the sending and receiving of remittances and international money transfers free of any fees and was launched as a limited scale pilot in the US and Guatemala in October last year. While it was originally intended for Diem to be the digital currency used for transactions via Novi, Meta had to resort to using Coinbase’s stablecoin Pax Dollar in light of the regulatory hurdles.

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Bank of Jamaica passes legislative amendments in support of its CBDC
The Bank of Jamaica has announced that it has successfully passed amendments to its Bank of Jamaica Act 2020 as per mid-June in support of the further implementation of its CBDC JAM-DEX. Under the amendments, JAM-DEX is officially considered legal tender with the Bank having sole authority over its issuance. Given the successful amendments, the Bank will progress with the planned full roll-out of JAM-DEX.

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Eastern Caribbean Central Bank provides further insights into DCash roadmap including its uptake
As part of the release of its annual report, the Eastern Caribbean Central Bank (ECCB) has summarized key achievements and next steps in relation to its CBDC pilot DCash. Since its launch at the end of Q1 2021, DCash has been rolled out across 8 islands with the latest roll-out to Anguilla completed at the end of June. Over 20 financial institutions and 11 agencies have participated in the pilot thus far. As part of the roll-out, statutory instruments were issued in all eight countries, given DCash the status of legal tender. The number of wallet holders has reached 4,000 to date and DCash in circulation was at $2.27 million, equivalent to 0.16% of all currency in circulation, at the end of Q1 2022. Since the introduction, several new features have been added to the application including increased wallet application security and the ability to add notes to transactions. As a next step, the platform will further enable government-to-consumer payments as well as an e-commerce functionality to support the wider use of DCash. To foster additional adoption, existing education efforts and merchant acquisition efforts will also be further expanded.

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ESG

International Sustainability Standards Board commences operations of its Montreal centre
The International Sustainability Standards Board (ISSB) has officially launched the operations of its Montreal centre. The launch was supported by several key activities including a new MoU with Montreal International to receive financial support from the Government of Canada and Quebec. Other efforts for operationalization included the appointment of Charles-Antoine St-Jean as Regional Director — Americas located in Montreal and the initial scheduling of several ISSB meetings during later in the year and the confirmation that the first ISSB Symposium will be held in Montreal.

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ESMA presents key findings and issues on the EU market for ESG ratings and data providers
The European Securities & Markets Authority (ESMA) has published the findings from its Call for Evidence on ESG rating providers, carried out on request by the European Commission under its Strategy for Financing the Transition to a Sustainable Economy. Designed as a broader market study, the call for evidence consolidated inputs from over 150 ESG rating providers, users and rated firms. Besides presenting key facts on the market including geographical distribution, nature of corporate structure and business model and key financials, the report also highlighted the persistent concerns over the usefulness and integrity of ESG ratings. Two third of ESG users indicated dissatisfaction with the level of methodological transparency, noting that “methodologies were deemed as often too complex and unclear, and sometimes providers were not able to further clarify how their results had been determined”. Other raised concerns relate to gaps in coverage of ratings, perceived conflicts of interest and the increase in prices due to higher market concentration. Responses from rated entities furthermore echoed the structural issues in the interaction with rating providers including difficulties in the ability to report rating errors, obtain feedback on the rationale of ratings and the practice of providers to charge fees for error identification and communication.

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Central Bank of Ireland hosts inaugural Climate Risk and Sustainable Finance Forum and publishes Sustainable Investment Charter
The Central Bank of Ireland has been further advancing its efforts on climate risk and sustainable finance with the organization of the inaugural meeting of its new Climate Risk and Sustainable Finance Forum, the launch of which was announced late last year. Chaired by the Central Bank, the new Forum, which is scheduled to meet twice per year, is consultative in nature and involves 30 members including regulated firms, climate change experts and other representative bodies. Concurrently with the first meeting, the Central Bank also published a dedicated Sustainable Investment Charter, which serves as a guide for the application of sustainable investment principles in the Bank’s own investment practices under its investment policy framework. The Charter is intended as a living document. Initially, the Bank’s approach will focus on exclusion/negative screening, impact investment and ESG integration as core strategies.

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KEY ENFORCEMENT ACTIONS

• US Securities & Exchange Commission charges Ernst & Young to pay $100 Million penalty for employees cheating on CPA Ethics Exams and misleading the Commission’s investigation
• Monetary Authority of Singapore reprimands crypto hedge fund Three Arrows Capital for providing false information and exceeding assets under management threshold

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