Page 31 - Banking Finance May 2023

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in regulatory reporting and streamlining variation margin of these institutions is that they mobilize savings and
(VM) processes in centrally and non-centrally cleared facilitate the financing of different activities, but they do not
markets. accept deposits from the public.

A CCP is an entity that interposes itself between the two Climate Related Risks and Financial Stability:
counterparties in a financial transaction. After the parties Climate risk, even a decade back, was not a prerogative of
have agreed to a trade, the CCP becomes the buyer to every either the policymakers, regulators, or the businesses.
seller and the seller to every buyer. In doing so, the CCP However, with the countries becoming increasingly exposed
reduces counterparty credit and liquidity risk exposures to climate related catastrophe (like wildfires in California,
through netting. It also provides standardised and Australia, and Brazil) and extreme weather events (droughts
transparent risk management. or floods) often causing severe disruption in supply chain or
hampering business continuity, the issue of climate change
Financial Reporting and Disclosure during has come to the fore. The risk is further compounded by
Economic Uncertainty: In its statement on financial mitigation related regulatory policies (say due to a carbon
reporting and disclosure during economic uncertainty, the tax or cap on fossil fuel usage or banning of diesel cars) that
IOSCO (International Organization of Securities imposes high adjustment costs for the businesses.
Commissions) has emphasised that auditors have the
responsibility of establishing and maintaining effective The FSB's final report on regulatory approaches to climate-
internal controls over financial reporting, and providing related risks has highlighted the need for policy authorities
transparent, entity-specific disclosures to investors about to focus on defining, identifying, and gathering climate-
the current and future effects of economic uncertainty. related data and indicators that can help with monitoring
and assessing climate risk as well as arrive at common
Enhancing the Resilience of Non-Bank Financial definitions for different risks. The report also notes that
micro-prudential tools alone may not sufficiently address the
Intermediation: The FSB published a progress report on
cross-sectoral, global and systemic dimensions of climate-
enhancing the resilience of non-bank financial
related risks. Authorities should consider the possible
intermediation (NBFI). This was aimed at assessing and
extensive effects of climate related risks on the financial
addressing vulnerabilities in specific NBFI areas that may
system and develop macro prudential tools by expanding the
have contributed to the build-up of liquidity imbalances and
use of climate scenario analysis and stress testing, with
their amplification in times of stress. These areas include
research and analysis on appropriate enhancements to
money market funds, open-ended funds, margining
regulatory frameworks.
practices, bond market liquidity and fragilities in USD cross-
border funding. The policy proposals aim to reduce liquidity
Crypto Assets and Financial Stability: The Basel
demand spikes; enhance the resilience of liquidity supply in
Committee has prescribed a global minimum prudential
stress; and enhance risk monitoring and the preparedness
treatment for banks' exposures to crypto assets to mitigate
of authorities and market participants. They involve largely
the risk from crypto assets, which was endorsed by the
repurposing existing policy tools rather than creating new
Governors and Heads of Supervision (GHOS) on December
ones, given the extensive micro-prudential and investor
16, 2022. Under the new standard, banks are required to
protection toolkit already available. The FSB will assess in
classify crypto assets on an ongoing basis into the following
due course whether repurposing such tools is sufficient to
two groups, where those in Group 2 will be subjected to
address systemic risk in NBFI, including the need to develop
newly prescribed conservative capital treatment effective
additional tools for use by authorities.
from January 1, 2025.
Non-bank financial intermediaries (NBFIs) comprise a mixed
Group 1: Tokenised traditional assets; and crypto assets with
bag of institutions, ranging from leasing, factoring, and
effective stabilisation mechanisms that are subject to
venture capital companies to various types of contractual
capital requirements based on the risk weights of underlying
savings and institutional investors (pension funds, insurance
exposures as set out in the existing Basel Framework; and
companies, and mutual funds). The common characteristic
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