Latest news with #FinancialStabilityBoard
Mint
21-07-2025
- Business
- Mint
Why are banks letting a useful tool for risk management gather dust?
The term 'risk appetite'(RA) gained currency after the 2008-09 financial crisis that began in the US. In 2013, the European Banking Authority (EBA) and Financial Stability Board (FSB) were the earliest regulators to include RA in formal regulatory asks. The Reserve Bank of India (RBI) in its 2014 Master Circular on Basel III Capital Regulations articulated the need for banks to document their RAs clearly. Bank boards and their managements are expected to set risk limits and lay down the types of risk exposure they plan to take in pursuit of profits. This is to be formally documented as a Risk Appetite Statement (RAS) and monitored for any breach. It calls for an upfront resolve that the bank will not take certain types of risk and keep those taken within the ambit of its stated risk appetite. Since some forms of lending are highly profitable in times of an economic boom but can erode more capital than the profits made if and when the cycle turns, an RAS encourages thinking beyond the short-term. The act of stating what level of risk the bank's board acknowledges as being borne by the business heightens the awareness of risks and ensures capital planning to cover them. To achieve their objectives, RAS limits and thresholds must be unambiguous, granular and quantitatively robust. However, that is often not the case. Also Read: Devina Mehra: Why investing in a bank often takes nerves of steel RAS as a neglected risk management tool: The actionability of a risk appetite statement has remained an issue. Globally and in India, only a few exemplar banks have well- designed, strategically relevant and definitive statements. In such cases, the RAS drives the strategic planning exercise. Further, enterprise-level thresholds cascade to the business-unit level, translating into growth projections, capital requirements and risk guard-rails for each unit. In contrast, at banks where the RAS serves only as a regulatory tick box, the strategy planning exercise rarely refers to the statement and business-unit level planning and risk-taking are not aligned with enterprise-level risk limits. At times, business unit heads are not even aware of how the enterprise-wide risk appetite applies to their operations. This leaves the board with limited control over the risks the bank actually ends up taking. Banks need impactful risk appetite statements. Let's focus on three aspects. Also Read: Banking on trust, losing billions: India's bank fraud epidemic needs urgent answers Explicit quantitative thresholds: Let's take the capital adequacy ratio (CAR), a common metric of a capital cushion to absorb losses. RA thresholds are often set on these. Say, the regulatory minimum CAR is 12% of risk-weighted assets. A bank cannot have a business plan that will cause its CAR to fall below 12% in an adverse situation of loans going bad. If a hypothetical Bank XYZ's CAR is 18%, to set a CAR threshold, it may take the average of the two (i.e. 15%) or review its historical CAR level and limit it to the average of that. Or it could take a number between its historically lowest CAR and its average. While this sounds comforting, such approaches lack economic rigour and risk relevance. Typically, for a healthy bank, the minimum capital to be held as directed by CAR regulation should be higher than its economic capital (EC), or the amount of equity required by the bank to cover a loss of 1-in-1000 odds, stylized as a 'once-in-1,000-years loss.' Likewise, a bank could take multicycle loss data to—adjusting for the fat-tail nature of credit losses—estimate the size of a 1-in-3 odds loss. If such an event reduces the capital cushion by a sum that hits the bank's CAR by one percentage point, then an RA limit set at 13% implies a 1-in-3 chance of dropping below the 12% regulatory minimum. Such a choice suggests a very high risk appetite. What would a conservative bank with a lower risk appetite do? If a 1-in-20 shock (much less likely to happen) is estimated to hit the CAR by 4 percentage points, it could set an RAS threshold of 16%. Either way, for the RAS to work meaningfully, the bank must make an explicit choice. Also Read: Needed: A hard policy reset to make Indian banks shape up Risk-adjusted performance measures: The Risk Appetite Statements of banks often have return-on-asset (RoA) and return-on-equity (RoE) thresholds. But this does not allow the estimation of capital consumption at the business-unit level. For this to be done, banks must calculate return-on-economic-capital (RoEC). This would help in measuring the economic value added at the business-unit level and thus help both in improving capital allocation and ensuring that the RAS cascades through the bank. Stress testing: Bottom-up portfolio-wise stress tests should be carried out to estimate the sensitivity of the bank's losses to relevant macroeconomic and geopolitical factors. This is critical to simulate and assess how a portfolio growth strategy will impact losses during a downturn. While banks perform stress tests to meet regulatory requirements, there is scant evidence that this exercise has been integrated with their RAS and strategic planning processes. Most banks perform 'static' stress tests, with their capital sufficiency tested under the assumption of, say, an X% surge in bank-wide losses. Also Read: IndusInd saga: No escape from heightened bank vigilance Banks must shift from treating the RAS as a tick-box routine to using it as a steering wheel for their strategy in the context of risk control. Without a functional RAS, a bank's board cannot properly supervise the risks being taken by business units in their rush to meet short-term targets. When stakeholders are hit by earning shocks or adverse disclosures, bank boards are often just as surprised as shareholders and the regulator. A well- designed Risk Appetite Statement could tackle this problem and result in markedly safer banking. The author is a quantitative risk management professional and a visiting faculty of risk management at IIM Calcutta.
Yahoo
16-07-2025
- Business
- Yahoo
What's Next for Stablecoins? Clearinghouses
With the expected passage of the GENIUS Act this week, the $260‑billion stablecoin market is on the cusp of becoming a formally regulated part of the U.S. financial system. The next step is institutional, bringing the time‑tested model of clearinghouses into the world of tokenized money. Why clearing matters Traditional clearinghouses, formally called central clearing counterparties, stand between buyers and sellers, netting exposures, collecting collateral and mutualizing losses if a member defaults. That plumbing is mundane until something breaks; then, it becomes the firewall that prevents a localized shock from becoming a systemic risk. Recognizing the 'too‑central‑to‑fail' profile of these utilities, the Financial Stability Board spent 2024 writing new global standards for their orderly resolution. Enter stablecoins, at global scale. They promise dollar‑for‑dollar redemption but trade on borderless blockchains where liquidity can evaporate in near real—time. Today each issuer is its own first and last line of defense; redemptions pile up exactly when asset markets are least forgiving. Stablecoin clearinghouses would pool that redemption risk, enforce real‑time margining, and give regulators a control panel for data and a toolbox for crisis intervention. To be sure, many will think that clearinghouses are anathema to a decentralized financial system, but via the Genius Act, D.C. and Wall Street are sending signals for the stablecoin industry to follow. Congress has already nudged us there Buried in Section 104 of the GENIUS Act is a quiet endorsement of central clearing: stablecoin reserves may include short‑term Treasury repo only if the repo is centrally cleared (or if the counterparty passes a Fed‑style stress test). That small clause plants a seed. Once issuers must interface with a clearinghouse for their own collateral management, extending the model to the tokens themselves is a short conceptual hop –especially as intraday settlement windows shrink from hours to seconds. Wall Street sees the opportunity The Depository Trust & Clearing Corporation (DTCC) — the utility that processes $3.7 quadrillion of securities every year — confirmed in June that it is 'assessing options' to issue its own stablecoin. Meanwhile, a consortium of the largest U.S. banks — backers of The Clearing House real‑time payments network — is exploring a joint bank‑backed stablecoin, explicitly citing their clearing expertise as a competitive advantage. As either of these, or other yet to be publicly announced ventures, proceed forward, the risk‑management stack that they bring to market will likely become the dominant blueprint. (Bank of America and Citi have both said recently they want to issue their own stablecoins.) New governance models are in motion The Bank for International Settlements said this month that stablecoins still 'fall short' of sound‑money tests and could trigger 'fire sales' of reserves without robust guardrails. If a mammoth player were to join a clearinghouse and then falter, the default could dwarf margin funds, raising too‑big‑to‑bail questions for taxpayers. Governance will likely converge on a bespoke framework; designing a charter that satisfies international regulators eyeing cross‑border spillovers will require the kind of multilateral horse‑trading typical of Basel committees. How a stablecoin clearinghouse would work Membership & capital – Issuers (and possibly major exchanges) would become clearing members, posting high‑quality collateral and paying default‑fund assessments just as futures brokers do today. Netting & settlement – The clearinghouse would maintain omnibus on‑chain accounts, netting bilateral flows into a single multilaterally netted position each block, then settling with finality by transferring stablecoins (or tokens representing reserve assets) between members. Redemption windows – If redemption queues spike beyond preset thresholds, the utility could impose pro‑rata payouts or auction collateral, slowing the bleed long enough for orderly asset sales. Transparency & data – Because every token transfer touches the clearinghouse's smart contract, regulators would gain a real‑time, consolidated ledger of systemic exposures — something impossible in today's fragmented pools. Congress is codifying the reserve and disclosure rules. Wall Street is preparing the balance‑sheet heft. And global standard‑setters are already sketching the resolution playbooks. CryptoExpect niche institutional use cases to dominate early — collateral mobility, overnight funding — resulting in intraday liquidity savings for institutions and a public‑good risk shield for the Fed. If crypto consortiums do not step in, TradFi-style clearinghouses will dominate the landscape. Sign in to access your portfolio
Yahoo
16-07-2025
- Business
- Yahoo
The Node: Stablecoin Supremacy
The governor of the Bank of England, Andrew Bailey, wrote a letter to the G20 yesterday stating that the Financial Stability Board (FSB) — the forum's financial overseer, which Bailey was appointed to head in April — is assessing the role of stablecoins in payments and settlements as a top priority. To the point: an analyst at Standard Chartered says that, once stablecoins hit the $750 billion mark, they may begin to influence the structure of U.S. Treasury markets. (Their market cap is currently at roughly $258 billion according to DefiLlama.) We also have Deribit making it possible for USDC holders to earn 4% yield, a crypto startup called Dakota raising $12.5 million to make it easier for businesses to move funds from U.S. dollars to stablecoins, and back again. These four headlines are all from today, and they're nothing out of the ordinary. We are used to seeing an abundance of news, every day, about stablecoin adoption. 'Stablecoins are crypto's killer app' has become a motto almost akin to 'stay humble, stack sats.' The underdiscussed winners of the stablecoin growth are market makers — the outfits that provide liquidity to crypto markets and ensure trades are executed efficiently. Kevin de Patoul, CEO of global investment firm Keyrock, recently told CoinDesk that demand for bitcoin and stablecoins outshined demand for any other type of cryptocurrencies by a wide margin. Even more interesting, demand for stablecoins is increasingly coming from companies that aren't crypto native, but consider stablecoins as a genuinely superior technology for international payments. 'That's really been a change over the last year and a half, seeing those assets being used for their superior efficiency, rather than simply a way to gain exposure to crypto,' he said. Stablecoins will show the way for the tokenization of stocks, money market funds, and other, stranger types of financial products. De Patoul expects the financial system's backend will be completely updated to improve user access to these vehicles. While tokenization is a bit of a newer and shinier concept for crypto natives — a little more like bleeding edge tech — stablecoins, with their 'mind-boggling' potential, will likely remain the bigger story for years to come, De Patoul said. 'Eventually, 50% of global payments are going to be made in stablecoins,' he said. 'Stablecoins are going to continue to be the biggest use case for digital assets for the next few years.' 擷取數據時發生錯誤 登入存取你的投資組合 擷取數據時發生錯誤 擷取數據時發生錯誤 擷取數據時發生錯誤 擷取數據時發生錯誤
Kuwait Times
15-07-2025
- Business
- Kuwait Times
G20 watchdog lays out climate plan but pauses amid divisions
LONDON: The G20's financial stability watchdog delivered a new plan on how to tackle climate risks on Monday, but paused further policy work amid a retreat by the United States that has tested efforts to advance a united financial policy on climate-related risks. The US has withdrawn from multiple groups dedicated to exploring how flooding and wildfires and big climate-related policy shifts could impact financial stability. In its medium-term plan, the G20's Financial Stability Board pledged to step up coordination and data sharing on climate-related financial risk. However, it said while progress had been made to integrate climate risks into financial systems, some of its members, who include central bank governors and ministers, were keen to pause further climate work. 'While many members feel there is a need for more work, some members feel that the work completed to date is sufficient,' the FSB said in an update to its 2021 climate roadmap delivered to G20 finance ministers meeting in South Africa. 'Going forward, the FSB will ... make determinations about what projects, if any, it will undertake.' US Treasury Secretary Scott Bessent would not attend the G20 meeting, Reuters reported last week. The United States is due to head the G20 group, which it helped found in the aftermath of the global financial crisis, next year. The FSB said it would continue to consider climate-related topics each year and would focus on its role as a coordinator of international work on climate risks. The watchdog said it did not have plans to do any more significant policy work on integrating climate-related financial risks into its supervisory and regulatory work. Work on this topic is ongoing at many of its member institutions, it said. The Brussels-based think tank Finance Watch said a lack of reference to concrete regulatory measures needed to address climate risks was a sharp retreat from the G20's original ambition and a moment of multilateral backsliding. 'It confirms what we've been hearing since the G20 Plenary in Madrid (in June): the FSB is backing down under pressure, especially from the US,' it said in a statement. 'If the G20 endorses this shift, we risk locking in a fragmented response. That weakens incentives for lagging jurisdictions (and) reduces multilateral pressure to act,' its head of research and advocacy, Julia Symon, added. Earlier this year, the FSB published work on the usefulness of transition plans for financial stability and in 2024 presented a stocktake of supervisory and regulatory work on nature-related financial risks. 'Rather than identifying such vulnerabilities a priority for further work, the FSB will leave that decision up to its annual work program process,' the FSB said in the report. The report detailed progress made since 2023 by international standard setters and global banking regulators. It also set out efforts to provide forward-looking data to help banks and companies quantify economic losses from climate shocks such as heatwaves. – Reuters
Yahoo
15-07-2025
- Business
- Yahoo
FSB Chair Makes Stablecoins a Priority Ahead of G20 Meeting
Assessing the role of stablecoins for payments and settlements will be a priority for the Financial Stability Board (FSB), Andrew Bailey, the recently appointed chair of the FSB and governor of the Bank of England, said in a letter to the G20 on Monday. Bailey, who started his role as chair in July, said the FSB should continue implementing its agreed stablecoins recommendations and monitor developments in this area across jurisdictions, ahead of the two day G20 meeting that starts on Thursday. The FSB, in 2021 suggested rules to monitor stablecoins in order to prevent them from disrupting the world's economy following their rise. The body which promotes global financial stability said last year, it would conduct further work on the challenges posed by stablecoins in emerging and developing economies, which have higher levels of adoption. Bailey also recently cautioned against global investment banks developing their own stablecoins in an interview with the Times. He argued that stablecoins could potentially weaken credit creation and monetary policy control. Stablecoins have increasingly become a priority for regulators across the globe, with the U.S. Senate passing stablecoin bill GENIUS and the stabelcoin market propelling to new highs.
