April Global Regulatory Brief: Risk, capital and financial stability
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
Recent periods of financial stress and the proliferation of risks across the financial system are fueling the development of regulatory initiatives to strengthen requirements and promote international best practice. The following policy developments represent a sample of wider regulatory and policy coverage available to Bloomberg Terminal customers. Run REGS <GO> to find out more or contact your Bloomberg representative to learn more.
- USA: Treasury to take more active role in banking regulation
- Singapore: MAS proposes new framework for retail access to private market funds
- EU: Commission Proposes Permanent Treatment for Short-Term SFTs under NSFR
- Korea: FSS announces third party risk management guidelines
US Treasury to take more active role in banking regulation
U.S. Treasury (UST) Secretary Scott Bessent outlined a strategic shift in the Treasury Department’s role in financial regulation during a recent address to the American Bankers Association in which he highlighted his agenda for bank regulatory reform in the US.
Context: With President Trump having tasked the Treasury Department with ensuring financial services regulators fulfil their statutory mandates, the Treasury Department intends to play a greater role in bank regulation through forums such as the Financial Stability Oversight Council and the President’s Working Group on Financial Markets.
Principles of Regulatory Reform: Secretary Bessent emphasized four core principles for the UST’s approach to bank regulation.
- Statutory Clarity: Regulations should be based on clear legal mandates such as safety and soundness, mitigating financial stability risks, and consumer protection.
- Efficiency: A balanced assessment of regulatory costs and benefits is essential.
- Fairness: Rules must be consistently applied across institutions and over time.
- Regulatory Efficiency: Regulatory bodies should operate effectively without unnecessary expansion of budgets or staff.
Focus on Community Banks: A significant portion of Secretary Bessent’s remarks highlighted the disproportionate impact of existing regulations on community banks. He noted that these institutions often face compliance burdens designed for larger banks, leading to increased operational costs and diverted resources. To address this, the UST intends to tailor regulations more appropriately, potentially including categorical exemptions for community banks from certain rules.
Enhancing Supervisory Practices: Alongside better tailoring of regulation, Secretary Bessent intends to re-focus bank supervision on material financial risks. Key initiatives include improvements to examination procedures and removing reputational risk as a basis for supervisory criticism.
Regulatory capital: Secretary Bessent identified capital requirements as a key driver of financial activity moving out of the regulated banking system toward non-banks.
- Secretary Bessent criticized the Biden Administration’s Endgame proposal and highlighted his ambition to reduce capital requirements for mortgage loans and other exposures that are core to the community bank model.
- Secretary Bessent floated the possibility of giving each bank that is not mandatorily subject to modernized requirements the option to opt in, as a way of ensuring that not only large banks benefit from reduced requirements.
- The UST will also consider the capital buffer framework given the role that the associated stress-testing indirectly plays in the pricing and allocation of financing.
Bank liquidity: Secretary Bessent remarked that the post-crisis framework that requires banks to hold significantly more high-quality liquid assets has strengthened liquidity but reduced availability of funds for loans and productive investments.
- There is now a push to reassess the current liquidity framework, explore ways to better utilize loans and other productive assets as collateral, and ensure liquidity buffers are used effectively during stress periods.
- The UST will re-evaluate the roles of tools like the discount window and Federal Home Loan Banks and will consider whether examiners have developed a bias toward reserves over other liquidity sources.
Other focus areas: The UST will also revisit other aspects of prudential regulation such as AML/CFT framework, consider reforms to deposit insurance in line with Congress, and consider enhancements to the process for failed bank resolution.
MAS proposes new framework for retail access to private market funds
The Monetary Authority of Singapore (MAS) is proposing a new Long-term Investment Fund (LIF) framework to give retail investors more access to private market investments.
Important context: Currently retail investors in Singapore have limited access to private market investments such as private equity, private credit and infrastructure, which are currently limited to institutional or accredited investors.
- MAS has observed increased interest both from retail investors looking to gain exposure as well as from industry players looking to offer private market investment fund products to retail investors.
Proposed framework: The proposed framework contains two fund structures to cater to different investor preferences.
- Direct fund: allows for direct private market investments offering more visibility of the underlying assets.
- Long-term investment fund-of-funds (LIFF): primarily invests in other private market investment funds, so that retail investors can rely on a manager’s expertise for diversification.
Consultation: MAS is consulting on the appropriate regulatory requirements for each structure as well as seeking views on the scope of private market investment assets that can be suitably offered to retail investors.
Feedback Deadline: MAS is inviting public comments by May 26, 2025.
EU Commission proposes permanent treatment for short-term SFTs under NSFR
The European Commission has proposed a targeted amendment to the EU banking prudential framework (CRR and CRD) to permanently maintain the current, more favorable liquidity treatment of certain short-term financial transactions.
Summary: The amendment seeks to make permanent the existing transitional treatment of short-term securities financing transactions (SFTs) with financial counterparties in the calculation of the Net Stable Funding Ratio (NSFR). The objective is to ensure a level playing field internationally in the regulatory treatment of such transactions.
Current Transitional Framework: Under the Capital Requirements Regulation (CRR), a transitional prudential regime allows favorable NSFR treatment for SFTs and unsecured transactions with maturities under six months involving financial counterparties. This regime is due to expire on June 28, 2025, and would otherwise be replaced by stricter Basel III-compliant requirements.
Rationale for the Proposal: International Alignment: The current EU treatment aligns with key jurisdictions—including the US, UK, Switzerland, Canada, and Japan—which have chosen to permanently deviate from the Basel standard regarding the calibration of NSFR for short-term SFTs. The proposal seeks to maintain regulatory consistency and competitiveness for EU banks.
Demonstrated Prudential Soundness: Since coming into force in June 2021, the current treatment has proven robust, including during recent stress periods such as the Russia-Ukraine conflict and the 2023 banking turmoil in the US and Switzerland.
Proposed Amendment: Without regulatory changes, the required stable funding factors for transactions with financial counterparties and maturities under six months would increase significantly:
- From 0% to 10% for SFTs collateralized by high-quality assets like sovereign debt
- From 5% to 15% for SFTs backed by other assets
- From 10% to 15% for unsecured transactions
The proposal aims to prevent these increases by maintaining the current treatment.
Next Steps: The proposed legislative amendment will now be reviewed by the European Parliament and the Council.
- It will enter into force once both institutions agree and the legislation is published in the EU Official Journal.
- With the current regime set to expire on June 28, 2025, the Commission urges co-legislators to act swiftly to ensure continuity and legal certainty.
Korea FSS announces third party risk management guidelines
South Korea’s Financial Supervisory Service (FSS) has introduced new guidelines to enhance financial institutions’ management of third-party risks.
Context: This initiative is a response to the increasing reliance on outsourced services and the associated operational risks. The guidelines aim to establish a comprehensive third-party risk management framework within financial institutions.
In more detail: The FSS highlighted that the digitalization of financial services and the diversification of product sales channels have led firms to depend more on outsourcing. This dependency has increased third-party risks, in addition to traditional risks like market and credit risks.
- The new guidelines require financial institutions to integrate third-party risk management into their existing enterprise-wide risk processes.
- Boards and senior management are responsible for defining and overseeing risk management policies, while executives must implement and maintain effective measures.
- High-risk outsourcing agreements will be given priority, necessitating robust contingency plans to mitigate disruptions from unexpected events.
- The FSS also stresses the need for thorough documentation of decision-making, risk assessment outcomes, and management actions in order to foster transparency.
Implementation: These guidelines will be implemented as self-regulatory standards through industry associations, tailored to the unique third-party risk characteristics of different sectors. They draw on international standards, such as those from the Bank for International Settlements (BIS), and are customized to the size, complexities, and specific third-party relationships of institutions.
Next Steps: The implementation of these guidelines will start with selected high-risk sectors by a broader rollout across the industry. Financial institutions are expected to adopt these self-regulatory standards and integrate them into their risk management frameworks.
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