IIF annual membership meeting: building resilience amid turbulence and transformation

Mon 30 Oct 2023

The IIF Annual Membership meeting is a setting for insights and perspectives from global financial regulators and senior financial sector executives on topical economic and regulatory issues. Being a forum with global coverage means that it is a valuable setting for picking up future economic and regulatory directions.

A packed agenda under the theme of Building resilience amid turbulence and transformation covered:

• Macroeconomic trends;
• Green transition and sustainability disclosures;
• Banking crises and regulatory priorities; and
• Digitisation of financial services including crypto assets.

This note presents key observations from those four topics.

Macroeconomic trends

Rising geopolitical tensions dominated discussions and how these tensions are leading to “re-shoring”, “friend-shoring” and “near-shoring” in firms’ supply chains. This will have varied capital investment impacts on different emerging markets; the current production supply chain moves from China to South-East Asian countries (e.g. Vietnam) being an example of such a shift. Irrespective of this, there was consensus that China remains vitally important to the global economy in spite of lower domestic growth forecasts compared to historical trends.

Inflation was the other key economic talking point. There has been contrasting inflationary experience in the US compared to Europe as a result of the energy price spike hitting Europe severely. Looking ahead, the view is that interest rates will be “higher for longer”, especially as economies have low unemployment. These high interest rates will impact on debt sustainability in western economies and keep growth rates sluggish.

There is a sense that we are still in the early phases of a new global political and economic era where geopolitical uncertainty is coupled with the global economy being at the start of a new interest rate/inflation environment (compared to the ultra-low interest, liquidity-rich setting of the past 15 years). Consequently there is a lot of uncertainty in financial markets about how the world will operate in this new paradigm in the near-term.

Green transition and sustainability disclosures

Three topics were prominent in the sustainability sessions; financing the transition, the role of transition plans and the importance of harmonised disclosures.

When it comes to financing the transition common themes were that the choice should not be between investing in green projects and rejecting brown investments, or that the path to green will be a linear jump. Instead for several economies, particularly in emerging economies, local priorities mean that the transition (and the financial investments to support it) will have to go through intermediary (light brown) phases before reaching green. For example, the role that gas can play in transitioning emerging economies away from coal and at the same time meeting an ever-increasing demand for energy from its citizens. Transition taxonomies were highlighted as having an important role to “legitimise” transition financing where the path to green is not immediate.

Transition plans was the sustainability buzzword at the meeting. Transition Plans have a critical role in informing how corporates’ and financial institutions’ operations are evolving to achieve low-carbon goals. A paper by the IIF published in the week of the Annual meeting describes how transition planning is inherently strategic in nature and about explaining business strategy. This is not the same as other regulatory reporting and so there are questions over who is best placed to assess the credibility of firms’ transition plans.

Regarding sustainability disclosures, there was strong acknowledgment for the International Sustainability Standards Board (ISSB), who produced the first set of global harmonised disclosure standards this year. Global standards are viewed as an essential building block to enable investors to compare firms’ progress in transitioning to a low carbon economy. There was also strong recognition that it will take time for firms to produce really robust disclosures (in a similar vein to how firms took a while to successfully embed IFRS global corporate reporting standards).

Another key building block to drive credibility in firm’s sustainability disclosures is having them audited/assured. International work is ongoing to produce a set of global sustainability assurance standards

Banking crises and regulatory priorities

Banking turmoil in the U.S. and Europe in Spring 2023 reminded us of potential fragilities in bank risk taking. The consensus was that deficiencies in banks’ risk management and governance lay behind the turbulence. Poor supervisory oversight of liquidity risks exacerbated banks’ own liquidity risk management weaknesses.

From a regulatory standpoint the banking turmoil did not lead to calls for more capital requirements. Instead the consensus was that regulators should focus on finishing Basel 3 implementation. The banking turmoil reminded banks and supervisory authorities of the importance of keeping resolution frameworks updated and that supervisory authorities ensure that Interest rate risk in the banking book is covered extensively in their Pillar II supervisory approach.

The recent banking failures did highlight how digitalisation and social media can exacerbate rapid deposit withdrawals leaving supervisory authorities with little time to respond. Discussions on how to enhance banks’ liquidity resilience in the face of this new challenge covered options such as:

i) raising liquidity requirements to even higher levels, but this moves towards narrow banking

ii) requiring more extensive pre-positioning of liquidity at the central bank, which could also be used intra-day. 

Non-Bank Financial Intermediation (NBFI) was a hot topic even though it was recognised as not being a new story.  The FSB is currently consulting on updating recommendations relating to liquidity mismatch in open-ended funds as part of its work programme to enhance the resilience of NBFI. A key area of policy focus for the FSB in 2024 is addressing financial stability risks stemming from NBFI leverage. A recent FSB report identified a number of data gaps that make it difficult to fully assess the vulnerabilities associated with NBFI leverage and outlines policy implications to address these vulnerabilities. Drawing on the findings of the report the FSB will be undertaking further policy work to enhance supervisory authorities’ and market participants’ ability to identify, monitor and contain systemic risk associated with leverage in NBFI.

Digitisation of financial services including crypto assets

Introducing a global baseline framework to support greater regulatory consistency across jurisdictions and tackle concerns arising from digital assets has been a priority for International regulatory authorities. In late spring 2023 IOSCO published a consultation report with policy recommendations to address market integrity and investor protection concerns for crypto-asset activities. In September IOSCO issued a consultation report with policy recommendations to address similar concerns arising from Decentralised Finance (DeFi). In July the FSB published high-level recommendations for the regulation, supervision and oversight of crypto-asset activities and markets and a separate report revising the high-level recommendations for the regulation, supervision and oversight of global stablecoin arrangements. The cross-border nature of these markets means that a global framework is all the more important and why the proposed recommendations also call for enhanced cross-border regulatory cooperation.

The rapid rise in awareness of AI and in particularly generative AI (such as ChatGPT) and their potential to transform banking operations led to AI being mentioned in several sessions. There was not a consensus on particular directions for AI’s impact, however there was consensus on the need to have strong data governance frameworks around the use of AI in order to prevent concerns such as bias and transparency in decision-making. Expect to see more detail on AI and its influence on banking operations in future annual meetings.