The Global Regulatory Brief provides monthly insights on the latest risk and regulatory developments. This brief was written by Bloomberg’s Regulatory Affairs Specialists.
Risk, capital and financial stability regulatory developments
The fallout from the collapse of Silicon Valley Bank (SVB) is continuing to occupy banking regulators with the Federal Reserve Board publishing its key takeaways on the episode. Furthermore, the role of non-bank financial institutions is also in the regulatory spotlight thanks to a speech from the FCA Chair Ashley Alder and the FCA has issued guidance to liability driven investment (LDI) managers given the events in the UK gilt market last autumn. Final preparations are underway for the US dollar LIBOR transition as the end-June deadline fast approaches and Australia has set out requirements regarding recovery and resolution planning for prudential firms. Abu Dhabi is to let funds originate and invest in private credit.
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- Federal Reserve Board lays out key takeaways on the collapse of Silicon Valley Bank
- FCA Chair calls for greater disclosure from non-bank financial institutions
- Abu Dhabi Global Market to allow funds to originate and invest in private credit
- FSB publishes statement on final preparations for US dollar LIBOR transition
- SEC proposes rules to improve risk management and resilience of covered clearing agencies
- FCA publishes guidance for LDI managers
- European legislators negotiate the final rules to implement Basel III
- Australia seeks to strengthen recovery and resolution planning
- US Treasury announces 2023 de-risking strategy
Federal Reserve Board lays out key takeaways on the collapse of Silicon Valley Bank
The Federal Reserve Board has released its report on the review of the supervision and regulation of Silicon Valley Bank (SVB). Led by Vice Chair for Supervision Michael S. Barr, the report discusses in detail the management of SVB and identifies four key takeaways on the causes of the bank’s failure. Namely, these are:
- SVB’s board of directors and management failed to manage their risks, such as basic liquidity and interest rate risk,
- Federal Reserve supervisors did not fully appreciate the extent of the vulnerabilities as SVB grew in size and complexity,
- When supervisors did identify vulnerabilities, they did not take sufficient steps to ensure that SVB fixed those problems quickly enough, and
- The Board’s tailoring approach in response to the Economic Growth, Regulatory Relief, and Consumer Protection Act and a shift in the stance of supervisory policy impeded effective supervision by reducing standards, increasing complexity, and promoting a less assertive supervisory approach.
While the report notes that SVB was in some ways an outlier because of the extent of its highly concentrated business model, interest rate risk, and heavy reliance on uninsured deposits, its failure does demonstrate wider weaknesses in regulation and supervision that needs addressing. Federal Reserve Chair Jerome H. Powell welcomed the report saying that the recommendations will lead to a stronger and more resilient banking system.
FCA Chair calls for greater disclosure from non-bank financial institutions
FCA Chair Ashley Alder has called for greater transparency in private markets that are not covered by prudential regulatory frameworks applicable to banks. Alder notes that non-bank financial intermediation (NBFI), also known as ‘shadow banking’ or ‘market based financing’, has grown to represent 50% of global financial assets. The essential characteristic of all NBFI firms is that none take customer deposits, meaning that their business models do not involve the type of maturity transformation – and the specific risks which this gives rise to – on which traditional bank regulation is focussed. While there is significant transparency in the open-ended fund, money market funds, and central counterparty segments of NBFI there is not enough data to measure key risks in private investments and funding markets.
The FCA is closely involved in the international work underway to develop a set of concrete policy outcomes for NBFI to expand financial stability regulation into investment markets. This is intended to provide a better understanding of hidden balance sheet leverage, liquidity risk assessment, and better information on exposures between private markets and traditional banks.
Abu Dhabi Global Market to allow funds to originate and invest in private credit
The Abu Dhabi Global Market (ADGM) has launched a new regulatory framework for private credit funds. The new rules issued by the Financial Services Regulatory Authority (FRSA) will allow funds and fund managers based in the ADGM to originate and invest in private credit. The popularity of credit funds has grown with investors driven by the opportunity to finance growth-stage companies and potentially realize competitive returns compared to other asset classes.
The move comes after neighboring UAE regulator, the Dubai Financial Services Authority (DFSA), implemented its own framework for private credit funds back in June 2022.
FSB publishes statement on final preparations for US dollar LIBOR transition
The Financial Stability Board (FSB) has published a statement to encourage final preparations for the US dollar LIBOR transition. With the end-June transition finishing line quickly approaching, market participants are encouraged to act quickly to ensure that legacy contracts are prepared to transition and should not rely on the availability of synthetic LIBOR rates in place of active transition of legacy contracts. For synthetic sterling LIBOR, the FCA has announced its intention that the remaining 3-month setting will cease at end-March 2024.
Further, the FSB underlines the importance of choosing robust reference rates that reflect deep, credible and liquid underlying markets. Adoption of SOFR, the Alternative Reference Rates Committee’s (ARRC) recommended replacement for USD LIBOR, has been significant. In both cash and derivatives markets, SOFR is now the predominant reference rate.
Finally, to support a globally consistent shift away from USD LIBOR to robust alternatives, IOSCO has also launched a one-time review of ‘credit sensitive rates’ and SOFR term rate alternatives to USD LIBOR. This review is expected to be finalized in June 2023.
SEC proposes rules to improve risk management and resilience of covered clearing agencies
The SEC has proposed rule changes that would improve the resilience, recovery and wind-down planning of covered clearing agencies. The proposal would amend the existing rules regarding intraday margin and the use of substantive inputs to a covered clearing agency’s risk-based margin system and add a new rule to establish requirements for the contents of a covered clearing agency’s recovery and wind-down plan. The public comment period will remain open for 60 days following publication of the proposing release on the SEC website or 30 days after publication in the Federal Register, whichever period is longer.
FCA publishes guidance for LDI managers
The UK Financial Conduct Authority (FCA) has published risk management guidance for Liability Driven Investment (LDI) managers to address market integrity and financial stability risks. Asset managers are expected to take the necessary steps to ensure that their LDI portfolios are resilient to future market volatility. With guidance on risk management, stress testing and client communication, many of the lessons will be relevant to firms beyond the LDI sector and the FCA expects a range of other market participation to consider its recommendations. The FCA publication follows the Bank of England’s March 2023 paper on LDI minimum resilience and comes as regulatory scrutiny on asset managers using LDI strategies has grown in the wake of the extreme volatility in the UK gilt market in September 2022.
European legislators negotiate the final rules to implement Basel III
The EU Council has published an information note on the proposed revisions to the Capital Requirements Regulation (CRR) setting out the opening negotiating positions of the EU Commission, the EU Parliament and the Council. With CRR III designed to implement the remaining Basel III banking standards, the final package will include new provisions around credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor. Final negotiations are on-going and an agreement is expected in the next few months, with the final text published by the end of the year.
Specifically on market risk and the implementation of the final Fundamental Review of the Trading Book (FRTB) standards, the Parliament is suggesting that banks should be able to hold several types of instruments usually held in the trading book (including listed equities) as banking book positions, subject to the approval of the national regulator and when that position is not held with trading intent.
The forthcoming implementation of Basel III is also referred to by the European Supervisory Authorities (ESAs) in their recent Spring report on risks and vulnerabilities in Europe’s financial system. Further, the ESAs call on firms and regulators to remain prepared for a deterioration in asset quality and to keep a close eye on loan loss provisioning. Organizations are also encouraged to consider the broader impact of policy rate increases and to closely monitor liquidity risks arising from investments in leveraged funds and the use of interest rate derivatives.
Australia seeks to strengthen recovery and resolution planning
The Australian Prudential Regulation Authority (APRA) has finalized new requirements and guidance aimed at strengthening the preparedness of banks, insurers and superannuation funds to respond to a crisis. The reforms follow several years worth of policy development to ensure the financial system is better prepared to manage periods of stress. Specifically, APRA consulted in December 2021 on two new prudential standards designed to improve recovery and resolution planning among APRA-regulated entities. The reforms aim to ensure that a bank, insurer or superannuation fund can recover or exit the market in an orderly manner if it were to get into difficulty.
US Treasury announces 2023 de-risking strategy
The US Department of Treasury issued the 2023 De-Risking Strategy, as mandated by Congress in the Anti-Money Laundering Act of 2020. The first of its kind, the Strategy examines the phenomenon of financial institutions de-risking and its causes, identifies those greatest impacted, and offers recommended policy options to combat it. De-risking occurs when financial institutions terminate or restrict business relationships indiscriminately with broad categories of customers rather than analyzing and managing the risk of those customers. De-risking undermines several key US government policy objectives by driving financial activity out of the regulated financial system, hampering remittances, preventing low- and middle-income segments of the population from efficiently accessing the financial system, and preventing the unencumbered transfer of humanitarian aid and disaster relief.
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