Quarterly update on financial services regulatory developments

The recent conflict in the Middle East, the Russia-Ukraine war, as well as ongoing US-China tensions are forcing regulators to increasingly consider geopolitical events that may have adverse financial, operational and compliance implications.

As such, we can observe regulators attempt to keep strengthening the resilience of the financial system by increasing capital requirements, enhancing resolution planning, and considering nonfinancial risks. As in the last quarter, we continue to see regulators mitigating climate-related risks and risks that arise from digital assets.

This quarterly update highlights key changes in supervisory priorities across jurisdictions in 3Q23 that may lead to increased regulatory requirements for financial institutions (FIs).

Regulators aim to increase the overall resilience of the financial system:

• US regulators focus on increased capital requirements for large and complex banks: In July 2023, following its 2023 stress test earlier this year, the Federal Reserve Board announced individual capital requirements for all large banks, effective since 1 October 2023. It also proposed to revise the surcharge calculation applicable to US global systemically important banks (GSIBs) and issued an update on liquidity risks and contingency planning, requiring depository institutions to regularly evaluate and update their contingency funding plans. In addition, US agencies proposed expanded long-term debt (LTD) requirements for large banks and certain insured depository institutions (IDIs). The proposed rule would improve the resolvability of these banks in case of failure. In September 2023, US agencies issued the long-expected notice of proposed rulemaking that would replace the risk-based capital framework for large banking organizations with a new framework, referred to as the Basel III endgame reforms, implementing international capital standards issued by the Basel Committee on Banking Supervision (BCBS). The new framework would apply to banks with US$100 billion or more in total assets and to banks with significant trading activity and would be fully phased in on 1 July 2028. Finally, the Federal Deposit Insurance Corporation (FDIC) proposed revisions to its rules on resolution planning. IDIs with US$100 billion or more in total assets would need to submit full resolution plans, while IDIs with total assets between US$50 and US$100 billion would need to submit informational filings. The proposed rule would also enhance how the credibility of the resolution submissions will be assessed and would expand FDIC's expectations regarding IDIs' capabilities testing.
• Canadian regulators to evaluate the loss-absorbing capacity of parent banks or life insurers: In September 2023, the Canadian regulator published its approach to assess the individual financial strength of the parents of domestic systemically important banks (DSIBs) and life insurers and their ability to act as a source of support for their subsidiaries and branches.

Regulators continue to address emerging nonfinancial risks and sustainability:

• The Canadian regulator aims to determine whether FIs have adequate policies and procedures to protect themselves against threats to their integrity, including foreign interference. A final guideline on integrity is expected in January 2024. Also, in the US regulators intend to prevent the illicit use of “shell companies” to conceal illegal activity or facilitate money laundering or tax evasion. As such beneficial ownership information reporting is expected to go into effect on 1 January 2024.
• Regulators to harmonize sustainability reporting worldwide: The standards IFRS S1 and IFRS S2, developed by the International Sustainability Standards Board (ISSB), are a global baseline for sustainability reporting and can be further developed by local jurisdictions. They will be effective for annual reporting periods beginning on or after 1 January 2024 and accompanied by a digital taxonomy expected in early 2024, which will support a consistent global implementation of the standards.
• While several jurisdictions already announced to incorporate these sustainability standards, timelines for implementation will vary across jurisdictions: In Europe, the European Sustainability Reporting Standards (ESRS) will be effective on 1 January 2024, while the UK intends to create its Sustainability Disclosure Standards (UK SDS) by July 2024. In North America, the Canadian regulator committed to incorporate the ISSB standards into its guideline on climate risk management and the U.S. Securities and Exchange Commission (SEC) proposed climate-risk-related disclosures last year, with the expectation to finalize the rules by October 2023. Several countries in Asia-Pacific welcome the ISSB standards. In Australia, mandatory climate disclosures for large FIs could apply from 2024. The Australian Accounting Standards Board (AASB) is expected to consult on the standards in the second half of 2023. Whereas Japan is preparing a local version of the ISSB standards, with final standards expected by 31 March 2025. Singapore, the first country to mandate ISSB reporting, will require public companies to start making climate-related financial disclosures from 2025.
• Initiatives on embedding climate-related risks into prudential frameworks and risk management are ongoing: For example, the BCBS plans to propose a Pillar 3 disclosure framework for climate risks across internationally active banks, by the fourth quarter of 2023, that would be interoperable with ISSB standards. Whereas the Network for Greening the Financial System (NGFS) outlined risks associated with the increase in climate-related litigations.

Regulators aim to further mitigate digital asset risks:

• New digital asset frameworks are evolving: In October 2023, regulators in Qatar set out proposals for introducing a digital assets framework. The proposals establish a tokenization framework and address issues, such as ownership of the underlying assets, custody arrangements, the transfer of ownership, trading and exchange of digital assets. In September 2023, the New York State Department of Financial Services (DFS) instituted a new general framework for greenlisted coins, including requirements for coin-listing and delisting policies of DFS-regulated entities, effective 18 September 2023.
• Regulators focus on capital treatment of crypto asset exposures: In July 2023, draft guidelines on Canada’s capital and liquidity approach to crypto assets for banks and insurances were released to align Canadian crypto asset rules with international standards. While banks should focus on the impact on credit valuation adjustment, operational risk, large exposure risk and counterparty credit risk, insurers will need to pay attention to operational risk, large exposure risk, and to foreign insurance branch requirements, as foreign insurance branches are not permitted to vest crypto asset exposures. Meanwhile, in the US, the Uniform Treatment of Custodial Assets Act was introduced in the House of Representatives in September 2023. It would rescind the SEC Staff Accounting Bulletin 121 by prohibiting the SEC from requiring certain institutions to include assets held in custody as a liability on their balance sheets.
• Regulators protect investors from risks of trading on unregulated digital platforms: All virtual assets service providers (VATPs) need to comply with Hong Kong’s VATP licensing regime (see: VATP guideline and circular), by 31 May 2024, or are required to exit the Hong Kong market. In addition, the regulator put in place measures to educate and warn investors about the risks of trading on unregulated VATP platforms.
• Regulators address tax evasion risks of digital assets: In August 2023, US regulators proposed regulations regarding the sales or exchanges of digital assets to address tax evasion risks. Brokers for digital assets would become subject to the same reporting rules as brokers for securities and other financial instruments. Meanwhile, EU Member States will have until 31 December 2025 to implement the EU tax transparency rules for crypto asset transactions, known as “DAC8,” into national law, ahead of it officially going into effect on 1 January 2026.

The views reflected in this article are views of the author’s and do not necessarily reflect the views of the global EY organization or its member firms.