Greg Kilminster
Head of Product - Content
ECB report reveals 90% of banks exhibit significant misalignment in credit portfolios with Paris Agreement goals
The European Central Bank (ECB) recently published a report assessing the risks associated with the misalignment of banks’ financing with the European Union’s climate objectives. The report uses the open-source Paris Agreement Capital Transition Assessment (PACTA) methodology. This forward-looking approach evaluates the risk that banks face due to the mismatch between their financing and EU policy objectives. The focus is mainly on sectors most impacted by the shift towards a low-carbon economy.
The report reveals that 90% of the 95 banks analysed exhibit significant misalignment in their credit portfolios with the goals of the Paris Agreement, which may result in elevated transition risks for these banks. These risks mainly arise from exposure to companies in the energy sector that are lagging in phasing out high-carbon production processes and are late in rolling out renewable energy production.
Furthermore, the report suggests that 70% of these banks may face elevated litigation risks as they have publicly committed to the Paris Agreement, but their credit portfolio is still misaligned with it.
To tackle these challenges, banks can leverage the methodology set out in the report to advance their transition planning capabilities. Banks that fall within the scope of the European Banking Authority’s Implementing Technical Standards on Pillar 3 disclosures on environmental, social, and governance risks can also use the methodology outlined in the report to meet this disclosure requirement.
In a blog post, Frank Elderson, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, emphasises the importance of banks identifying and measuring the risks associated with the transition towards a decarbonised economy. He states, “As ECB Banking Supervision, we will continue to play our role in spurring banks to manage the inevitable risks materialising from the transition, just as they would for any other risk. This will ensure the banking system remains resilient and sound in our net-zero future.”
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FSB sets out 2024 work programme
The Financial Stability Board (FSB) has announced its work programme for 2024, which includes priority areas such as promoting global cooperation on financial stability, addressing financial risks from climate change, and harnessing the benefits of digital innovation while containing its risks.
Additionally, FSB aims to deliver key reports to the Brazilian G20 Presidency in 2024, with the 19th G20 Summit being held on 18 and 19 November 2024 in Rio de Janeiro.
These include:
- A final report, in February, with recommendations to address structural vulnerabilities from liquidity mismatch in open-ended funds.
- A progress report in July on enhancing resilience in non-bank financial institutions and a stocktake of regulatory and supervisory initiatives related to nature-related financial risks.
- In October, FSB will release an annual report on the implementation of the cross-border payments roadmap, a report on the financial stability implications of tokenisation, a report summarising the work on interest and liquidity risk, and a report on deposit behaviour and the role of technology and social media.
- Ahead of the summit in November, FSB plans to issue a report on the financial stability implications of AI and its annual report on promoting global financial stability.
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FCA’s CEO speech on consumer tech
In a speech at Imperial College London Business School, Financial Conduct Authority (FCA) CEO, Nikhil Rathi spoke about consumer tech in financial services regulation.
Drawing an analogy to the New Year demand for weight loss commitment, Rathi outlined two scenarios for the future of consumer tech in financial services.
The ‘full-fat’ option
In the technology-heavy adoption option, Rathi envisions a hyper-digitised and personalised future with seamless financial and public service integration facilitated by digital identity tools and biometrics.
Advanced technology, including telematics, enables participants to track driving habits, influencing insurance coverage pricing based on the nature and time of journeys.
The potential benefits of this ‘full fat’ scenario include real improvements in tailored products, increased services, heightened competition, and a diverse range of firms offering financial services. Rathi noted that research indicates positive impacts on jobs and productivity by fintechs, with an average annual expansion rate of 20%.
Despite the potential benefits, Rathi noted downsides, including concerns about hyper-personalisation leading to exclusion, potential dominance of tech and banking giants, and blurred boundaries between financial activities risking long-term financial well-being. In the outlined scenario, there is, therefore, a need to address gaps in financial literacy, competition concerns, and potential security compromises. If not handled correctly, Rathi hinted at the possibility of a “techlash” – a backlash against technology.
The ‘skimmed’ option
In the technology-lite option, Rathi indicated that a scenario of incremental progress on consumer technology with minimal innovation could be considered. This approach favours human contact over AI prompts or robo-advice, giving a competitive advantage to maintaining physical bank branches. Rathi suggests this could appease one part of society whilst alienating those who prefer tech-enabled services for financial management.
In this scenario, the adoption of deep digitalisation is slow, with a focus on payments and savings. Big Tech firms concentrate on infrastructure like the cloud, avoiding regulatory involvement and keeping their valuable data away from financial firms.
Incumbent providers, cautious of sunk IT costs, resist catching up with technology, leading to a lack of innovation. Privacy concerns impede personalisation efforts. The positive aspects include avoiding widespread tech failures, but the downsides involve entrenched inequalities, potentially suboptimal investments for retail consumers and continued entrenched financial exclusion for those already disengaged. With little innovation appetite, only tech giants invest at scale, distorting competition, bloating traditional firms’ cost base, impacting long-term returns, and hindering the UK’s fintech hub success.
This scenario, Rathi argues, risks missing out on productivity gains, job opportunities, investment, and growth, jeopardising the country’s ambitious fintech goals.
Rathi’s then raised a number of questions:
- Which of these two scenarios might prevail?
- Is a fundamentally different regulatory mindset required?
- Should regulators permit the most ambitious adoption of regulatory technology?
- What is the UK’s appetite for risk as a country?
- Is a few people losing out worth the risk of wider benefit to consumers and potentially economic productivity?
- What about public trust?
- What happens when big technology systems fail – and is there public confidence that the authorities will act swiftly enough?
Rathi moved on to stress the importance of fostering competition and innovation while avoiding barriers to market entry imposed by monopolistic providers of popular technologies. He acknowledged that the demand for specific technologies or data can drive positive outcomes, including innovation and competition. However, a potential downside exists when everyone gravitates toward these technologies, leading to material barriers to entry and consolidating market power. He also addressed the FCA’s recent Big Tech consultation, which raised concerns about data asymmetry, recognising the short-term benefits of Big Tech entering financial services but noting a long-term risk of eroding competition benefits if these firms exploit their entrenched market power.
Rathi then reminded the audience of the FCA’s move towards outcomes-based regulation, notably through the new Consumer Duty, which extends to consumer technology in financial services. Firms must now demonstrate that their products and services aim to deliver positive customer outcomes.
He also stressed the likely increased use of criminal powers to deter serious harm to markets and consumers in the upcoming year.
In a section of the speech noting that the FCA is as much a data regulator as a financial services one, he acknowledged that progress in open banking in the UK has slowed, suggesting that growth, innovation, competition, and the UK’s international competitiveness could stall unless the appropriate data was made available to smaller, more agile players. He added that operational resilience will be key to the development of consumer tech in financial services, reminding the audience there is an ongoing consultation on critical third parties around operational resilience and that one institution was fined nearly £49m for failing to address outsourcing risk for their planned IT upgrade leaving customers with patchy service for half a year.
Rathi noted the FCA’s concerns about financial exclusion, not leaving behind individuals who rely on cash, and the potential role of technological solutions. He stressed the need for greater financial education to address this issue and the importance of industry involvement and investment in fostering societal trust.
Concluding his speech, Rathi noted: “Sometimes we think too much about what we stand to lose rather than what we stand to gain. We should be at the forefront of enabling technological innovation. And that means recognising that data is the preserve of the consumer and – with their permission – should be open to all, not just to the Big Tech firms.”
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CFPB proposes new rule to ban junk fees charged on bank accounts
The Consumer Financial Protection Bureau (CFPB) has proposed a new rule targeting banks and financial institutions that charge junk fees for transactions declined in real-time. The proposed rules would ban nonsufficient funds (NSF) fees on transactions that are instantly refused after the customer initiates the transaction using debit cards, ATMs, or certain person-to-person apps.
The new rules would make charging such fees unlawful under the Consumer Financial Protection Act.
This proposal is part of the CFPB’s multi-front strategy to safeguard consumers against unlawful NSF fees. In July 2023, Bank of America was fined more than $100 million for double-dipping on NSF fees, among other unlawful behaviour.
According to CFPB Director Rohit Chopra, “Banks should compete to provide better products at lower costs, not innovate to impose extra fees for no value. The CFPB will continue to rid the market of junk fees today and prevent new junk fees from emerging in the future.”
The deadline for feedback is 25 March 2024.
Click here to read the full RegInsight on CUBE’s RegPlatform
EBA releases heatmap post assessment of IRRBB implementation
The European Banking Authority (EBA) has released a heatmap that assesses the implementation of the interest rate risk in the banking book (IRRBB) standards across the European Union (EU). The heatmap also considers the impact of rising interest rates on institutions.
The document includes an overview of the regulatory framework, EBA’s scrutiny plans and progress to date, areas of scrutiny with corresponding actions and timelines, policy aspects that require further scrutiny, and corresponding actions in the short, medium, and long term.
The EBA will continue to engage with stakeholders on the various aspects identified in the heatmap while making progress on this work.
Click here to read the full RegInsight on CUBE’s RegPlatform
Singapore launches Sustainable Finance Association to drive regional net zero transition
In a speech welcoming the launch of the Singapore Sustainable Finance Association (SSFA), Chia Der Jiun, Managing Director of the Monetary Authority of Singapore (MAS), spoke about the region’s commitment to sustainable finance initiatives.
Singapore’s progress in sustainable finance
Der Jiun highlighted Singapore’s remarkable progress in sustainable finance over the past decade, from the launch of responsible financing guidelines for banks in 2015 to the recent unveiling of the Finance for Net Zero Action Plan in 2023, which broadens the focus from pure green to include transition finance, recognising the comprehensive nature of greening the economy.
Der Jiun noted that Singapore now stands as the Association of Southeast Asian Nation’s (ASEAN) largest market for green, social, sustainability, and sustainability-linked bonds and loans, with more than S$30 billion worth of such transactions originating in 2022. The nation also boasts vibrant carbon services and trading ecosystems, making it a key centre for climate risk financing instruments.
Leadership in driving change
Der Jiun stressed Singapore’s role in leading change and seeding solutions on both national and international fronts, adding that MAS has been proactive in proposing supervisory expectations for financial institutions to have sound transition planning processes. He also noted that the recent launch of the Singapore-Asia Taxonomy (which sets out detailed thresholds and criteria for defining green and transition activities that contribute to climate change mitigation across several sectors) demonstrates Singapore’s commitment to directing capital flows to green and transition activities.
Strengthening sustainable finance growth
Der Jiun outlined a strategic vision for the SSFA, focusing on three pillars:
- Standards: clarity and credibility in standards are key to a trusted sustainable finance centre. MAS has already issued guidelines for the disclosure and reporting of ESG retail funds, along with an industry code of conduct for ESG Rating and Data Product Providers.
- Solutions: innovative financing approaches are crucial for mobilising private capital for the net-zero transition. Blended finance and the carbon market, particularly the concept of transition credits, were highlighted as key tools to unlock financing for green and transition projects.
- Skills: a deep pool of skilled and adaptable talent is essential to support the evolving landscape. MAS, in collaboration with the Institute of Banking and Finance (IBF) and Workforce Singapore, is creating a Jobs Transformation Map to study the impact of sustainability on the financial sector workforce.
Deepening cross-sector collaboration through the SSFA
Der Jiun positioned the SSFA as a key platform to achieve collaboration among financial institutions and industry sectors. It will, he argued, play a crucial role in setting standards, driving innovative solutions, and developing skills to further strengthen Singapore’s position in sustainable finance.
Conclusion
In concluding, Der Jiun emphasised that sustainable finance is a key thrust of Singapore’s development as a leading international financial centre. The SSFA, he said, is poised to play a pivotal role in shaping the sustainable finance landscape in the region for years to come.
Click here to read the full RegInsight on CUBE’s RegPlatform