Page 2 - BANKING, INSURANCE AND FMI QUARTERLY BULLETIN

Financial Market Infrastructure (FMIs)
RBNZ, FMA Release Finalised Regulatory Framework for FMIS (January 2022)
The Reserve Bank of New Zealand (RBNZ) and the Financial Markets Authority (FMA) have finalised a framework for assessing the systemic importance of financial market infrastructures (FMIs).
The framework was released following a consultation with industry members and stakeholders.
FMIs are a set of critical systems that facilitate electronic payments and financial market transactions, the regulatory agencies said. Under the Financial Market Infrastructure Act, RBNZ and FMA have joint responsibility to oversee FMIs, which are sometimes referred to as the plumbing of the financial system.
Christian Hawkesby, RBNZ deputy governor and general manager of financial stability, said the framework provides guidance for determining whether an FMI will be deemed of systemic importance.
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Assessment of Risks to Financial Stability from Crypto-assets
Crypto-asset markets are fast evolving and could reach a point where they represent a threat to global financial stability due to their scale, structural vulnerabilities and increasing interconnectedness with the traditional financial system.
This report examines developments and associated vulnerabilities relating to three segments of the crypto-asset markets: unbacked crypto-assets (such as Bitcoin); stablecoins; and decentralised finance (DeFi) and other platforms on which crypto-assets trade. These three segments are closely interrelated in a complex and constantly evolving ecosystem and need to be considered holistically when assessing related financial stability risks. The report notes that although the extent and nature of use of crypto- assets varies somewhat across jurisdictions, financial stability risks could rapidly escalate, underscoring the need for timely and preemptive evaluation of possible policy responses.
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Insurance
FSB Publishes Papers on Funding and Interconnectedness Practices to Aid Resolution Planning For Insurers
The practices paper on Resolution Funding for Insurers discusses the different sources of resolution funding, including privately funded policyholder protection schemes and standalone resolution funds, and how they interact with each other when both exist. The paper also discusses temporary funding sources for resolution funds and mechanisms in place to recover funds used in resolution.
The practices paper on Internal Interconnectedness in Resolution Planning for Insurers explores ways to map and assess financial and operational interconnectedness in insurance companies. Individual insurance entities within a group or conglomerate are often linked with other entities within the group through financial exposures and receive operational services from them. These linkages may be critical for their financial and operational continuity and may, therefore, have an impact on the design and choice of the preferred resolution strategy.
The Regulatory Response to Climate Risks: Some Challenges
There is a need for authorities to review their prudential frameworks with a view to taking full account of the implications of climate-related financial risks for financial stability.
Given the longer time horizons and the higher degree of uncertainty associated with the materialisation of climate-related financial risks, standard Pillar 1 instruments might be suboptimal in addressing such risks.
In contrast, the intrinsic flexibility of the Pillar 2 framework makes it the natural candidate for ensuring that banks effectively manage such risks and have sufficient loss-absorbing capacity against them.
Applying the current macroprudential framework to contain systemic climate-related financial risks is likely to be ineffective and potentially counterproductive for financial stability. The same could be said of the introduction of a green supporting factor.
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