Your weekly summary of key regulatory updates in an objective bite-size format, drawing on official news and press releases from 400+ financial services regulators, central banks as well as global and regional standard setters
At a glance - Highlights by topic
(Expand topics via arrow and/or click on topic to skip directly to sections)
Latest ECB review highlights deteriorating financial stability conditions but considers banks resilient EBA consults on guidelines for resolvability testing FSB releases its annual report OSC study evidences that gamification techniques influence retail investors’ trading behaviours New BIS study evidences that crypto app use increases when the price of Bitcoin rises New York Fed‘s Innovation Center announces participation in PoC to test feasibility of an interoperable network of central bank wholesale digital money and commercial bank digital Abu Dhabi Global Markets launches new crypto hub Central Bank of Montenegro forms Working Group to draft crypto asset law FSB releases final report on the approach to monitoring progress vis-à-vis the targets under G20 cross-border payments roadmap South-East Asian Central Banks sign MoU on regional payment connectivity Federal Reserve Board Working Paper issues working paper on the macroeconomic impacts of a CBDC European Central Bank joins Gaia-X Project
Latest regulatory reactions to the FTX implosion
Prudential & financial stability
Latest ECB review highlights deteriorating financial stability conditions but considers banks resilient
The European Central Bank has released its latest financial stability review. Consistent with previous assessments, the review confirms a further deterioration of financial stability conditions. Main concerns continue to center around the high inflation and recession risk and the impact on indebted households and firms, the volatility in financial markets and the risk of disorderly price adjustments as well as the potential threats to banks’ asset quality including an increase in underperforming loans and need for higher loan loss provisions. The review concludes that banks are expected to have the necessary resilience to withstand the worsening conditions thanks to their strengthened balance sheets and capital positions, yet suggests that continued implementation of Basel III along with targeted other macroprudential policy action such as increases in capital buffers will further enhance resilience. In contrast, the structural vulnerabilities in the non-banking sector including investment and money market funds call for a more comprehensive policy reform.
EBA consults on guidelines for resolvability testing
The European Banking Authority has launched for consultation new guidelines on resolvability testing. The proposed guidelines, which will be subsumed under the Guidelines EBA/GL/2022/01 on improving resolvability for institutions and resolution authorities, are intended to support the transition from policy development to the effective implementation of resolution arrangements by providing a framework for testing adequacy and maturity of capabilities. The framework foresees a joint process by banks and resolution authorities, whereby banks are expected to complete annually a resolvability self-assessment which then forms the basis for the multi-annual resolvability testing programme by resolution authorities. The authority-led testing programme is proposed to cover a period of three years to enable banks to optimize their resolution planning and to follow a risk-based approach. Besides these expectations, the guidelines also foresee that the most complex institutions prepare a master playbook to ensure a holistic approach to resolution planning. The playbook would cover aspects such as the roles and responsibilities of senior management, the manner and timeframes for decision-making in the run-up and into resolution, specifics of the information to support decision-making, and details on how the different elements of the execution of the resolution strategy interact with each-other
Financial Stability Board releases its annual report, reiterating its previously articulated global financial stability concerns and provides a snapshot of the key initiatives under its 2022 work programme to foster global financial stability
Market conduct & consumer protection
OSC study evidences that gamification techniques influence retail investors’ trading behaviours
The Ontario Securities Commission has released the results of a new study assessing the impact of gamification and other behavioural techniques on retail investor behavior through a combination of experimental and exploratory research. As part of the experimental work, the study assessed the impact (1) the gamification technique of giving investors points for buying or selling stocks and (2) the behavioural technique of showing investors a list of top traded stocks in a simulated digital trading environment with over 2,400 participants. In both cases, the techniques were shown to impact trading behavior relative to a control group. Specifically, participants under the points reward scheme were shown to make nearly 40% more trades than the control group while the investors that were exposed to the top trading stocks were 14% more likely to trade these. On the basis of the exploratory research, the report further offers a taxonomy of the currently observed gamification and other behavioural techniques and assessment of their impact. The report concludes that regulators should consider whether to limit digital trading platforms from offering points or other rewards for trading activity given the significant impact. It also recommends that additional data be collected and simulations be carried out to expand the impact of other techniques.
Fintech & ecosystem innovation
New BIS study evidences that crypto app use increases when the price of Bitcoin rises
The Bank for International Settlements has released the findings of a new study on the adoption and use of crypto trading apps. The study, which draws on data on the retail use of crypto exchange apps at daily frequency for 95 countries over the period 2015-2022, reviews the relationship between crypto adoption and Bitcoin price changes as well as other macroeconomic variables. Findings show a correlation between a rise in the price of Bitcoin and an increase in new crypto trading app users, evidenced by a correlation coefficient of more than 0.9, and establish the Bitcoin price as the dominant factor that accounts for the variation in the entry of new users when controlling for other variables such as global uncertainty or volatility. Demographic analysis further shows that approximately 40% of these new users represent males under the age of 35, which are commonly viewed as the most risk-seeking population segment. Connecting this insight with analysis on risk aversion, the findings support the argument that rising Bitcoin prices attract speculative users with a high tolerance for risk by showing that young men have a significantly higher sensitivity to Bitcoin prices. Beyond this, the study also estimates that between 73-81% of retail investors have lost money since their initial investment due to the recent price declines.
New York Fed‘s Innovation Center announces participation in PoC to test feasibility of an interoperable network of central bank wholesale digital money and commercial bank digital
The Federal Reserve Bank of New York has announced that it will participate in a proof-of-concept project organized by the private sector to explore the feasibility of a theoretical payment system that is designed to facilitate and settle digital asset transactions. Specifically, the project involves testing the concept of a regulated liability network whereby distributed ledger technology is applied to settle the liabilities of regulated financial institutions through the transfer of central bank liabilities. As part of that, the technical feasibility, legal viability and business applicability of the concept will be assessed. The 12-week project will conclude with the release of a report.
The Abu Dhabi Global Markets (ADGM) launches new crypto hub on the sidelines of its annual Finance Week. The hub serves as a virtual platform that offers information on the ADGM’s ecosystem for virtual assets and the underpinning regulatory framework.
The Central Bank of Montenegro forms Working Group responsible for the development of a working draft for a dedicated crypto asset law. Besides the Central Bank, the Working Group consists of representatives of the Ministry of Finance, the Capital Market Authority and the Insurance Supervision Agency.
Payments & currency
FSB releases final report on the approach to monitoring progress vis-à-vis the targets under G20 cross-border payments roadmap
The Financial Stability Board (FSB) has released its final report that lays out the proposed approach and key performance indicators to assess the progress towards the targets established under the G20 Roadmap for Enhancing Cross-border Payments. The release follows the interim report published in July.
The monitoring framework establishes indicators for the three core segments wholesale, retail and remittances. Indicators are linked to the four themes of cost, speed, access and transparency, reflecting the core overarching challenges currently prevalent in cross-border payments and the global targets established for their improvement. Where already known, the report identifies the data sources that are planned to be used for construing the indicators, drawing on both private sector sources and established global databases such as the World Bank’s Findex Database and Remittance Prices Worldwide database in the case of remittances. The process for finalizing the agreement with potential data providers and developing baseline estimates of the indicators is expected to take several more months according to the report.
The Bank Indonesia, Bank Negara Malaysia, Central Bank of the Philippines, Monetary Authority of Singapore and Bank of Thailand agree to strengthen and enhance cooperation on regional payment connectivity through a new dedicated MoU
A new Federal Reserve Board Working Paper presents key findings from a literature review of the macroeconomic impacts of a CBDC in developed economies such as the United States and discusses how different design choices such as in relation to remuneration can affect the nature of impact
COP27 concludes with agreement on new loss and damage fund as historic achievement
The two-week long COP27 has concluded, resulting in a comprehensive package of decisions. At the center of attention has been the agreement for the creation of a dedicated loss and damage fund, intended to provide financial support developing countries that are particularly impacted by climate change. The agreement comes after decade-long discussions and is viewed as a historical milestone. The new funding arrangements will be operationalized under the leadership of a transitional committee, with details of the operationalization including sources of funding planned to be negotiated during COP28 at the end of 2023 based on recommendations from the Committee.
Joint FSB and NGFS report summarizes state of play of climate scenario analyses by financial authorities
In a new joint report that was submitted to G20 leaders for the Bali Summit, the Financial Stability Board (FSB) and the Network for Greening the Financial System (NGFS) provide a stocktake climate scenario analyses undertaken by financial authorities. Drawing on survey responses collected from 53 institutions from 36 jurisdictions across the FSB and NGFS membership, report offers an overview of the scope, objectives and methodologies adopted as well as provides insights into the main findings and lessons learned to date. Findings indicate that despite increasing adoption, climate scenario analyses remain at a nascent stage. While NGFS scenarios are frequently used or references, there remains significant heterogeneity in the specifics of approaches observed across authorities. Likewise, outputs from scenario analyses in most cases do not yet translate into micro- and macroprudential policies and instead have largely an awareness raising and capability building function. Furthermore, data challenges remain a critical hurdle in the effective implementation.
In terms of vulnerability assessments, exercises so far indicate that significant GDP and financial losses are expected in both disorderly transition scenarios and by extension a no-transition scenario while impacts under an orderly scenario are assessed to be manageable. At the same time, respondents cautioned that the tail risks arising from climate change may not be as manageable and stressed that the measures of exposure and vulnerability are likely understated as a result of “metrics […] not capturing second-round effects, potential climate non-linearities, and the costs and potential further externalities from risk management measures taken by financial and nonfinancial firms.”
ESAs call for evidence on greenwashing
The European Supervisory Authorities (ESAs) have jointly launched a call for evidence on greenwashing. Purpose is to gather input that will inform the understanding of the key features, drivers and risks associated with greenwashing and the areas most susceptible to greenwashing as well as to collect examples of potential greenwashing practices and data that can help to determine the magnitude of greenwashing. The structure of the questionnaire reflects the different dimensions through which greenwashing can be analyzed including the role market participants can play in greenwashing, the actual topics on which the sustainability-related claims are made, the way in which a claim can be misleading and the channels through which the sustainability-related claims are communicated to other actors across the sustainable value chain. The call for input is directed at a broad range of stakeholders including financial institutions, retail investors, consumer associations, NGOs, academia and other private sector institutions.
ESMA proposes new guidelines for the use of ESG or sustainability-related terms in fund names
The European Securities & Markets Authority (ESMA) has issued for consultation new guidelines that address the use of ESG or sustainability-related terms in fund names. At the core of the guidelines is the proposal to introduce quantitative thresholds on the minimum proportion of investments when using the respective terms in fund names, thereby creating better assurance the name of the fund is aligned with its investment characteristics and objectives. ESMA proposes to set this threshold at 80% for ESG-related terms, meaning that a minimum proportion of at least 80% of its investments would need to be used to meet the environmental or social characteristics or sustainable investment objective. Where a fund name carries a sustainability-related term, it should allocate at least 50% of the 80% to sustainability-related objectives. According to the proposal, the thresholds would also apply in the case of funds designating an index as a reference benchmark. Funds would be expected to make the information on the minimum proportion of investments available in the pre-contractual disclosures.
The Central Bank of Kuwait has issued a circular for local banks on sustainable finance. The circular, available currently only in Arabic, provides an overview ESG factors and sets out several expectations towards bank including inter alia the expectation to incorporate ESG considerations into governance and risk management, to set clear goals for sustainable financing, to issue financial products that are compatible with green financing activities as well as to apply principles of sustainability in own bank operations.
Other transversal themes
European Central Bank joins Gaia-X Project, a non-project organization that develops common standards for digital services including cloud service providers with the aim to establish a data space ecosystem where many cloud service providers are linked in a wider, transparent and open ecosystem.
John W. Schindler has been appointed as new Secretary General of the Financial Stability Board, succeeding Dietrich Domanski in the role.
© 2022 REGXELERATOR