In February 2024, the G20 Finance Ministers and Central Bank Governors asked the FSB to conduct a stocktake of regulatory and supervisory initiatives associated with the identification and assessment of nature-related financial risks, including to investigate the perception of central banks and supervisors regarding whether nature degradation, such as biodiversity loss, is a relevant financial risk.

The stocktake summarises current and planned regulatory and supervisory initiatives, and presents the key challenges for authorities in identifying, assessing and managing nature-related financial risks. The report also includes some case studies on initiatives by authorities and international organisations (the Network for Greening the Financial System (NGFS), World Bank, Organisation for Economic Co-operation and Development (OECD), Taskforce on Nature-related Financial Disclosures (TNFD), De Nederlandsche Bank (DNB)).

The Committee welcomes comments on the proposed Principles for the sound management of third-party risk, which should be submitted to https://www.bis.org/bcbs/commentupload.htm by 9 October 2024.

• Machine learning models excel at harnessing massive computing power to impose structure on unstructured data, giving rise to artificial intelligence (AI) applications that have seen rapid and widespread adoption in many fields.
• The rise of AI has implications for the financial system and its stability, as well as for macroeconomic outcomes via changes in aggregate supply (through productivity) and demand (through investment, consumption and wages).
• Central banks are directly affected by AI's impact, both in their role as stewards of monetary and financial stability and as users of AI tools. To address emerging challenges, they need to anticipate AI's effects across the economy and harness AI in their own operations.
• Data availability and data governance are key enabling factors for central banks' use of AI, and both rely on cooperation along several fronts. Central banks need to come together and foster a "community of practice" to share knowledge, data, best practices and AI tools.

Currently, most data centers are located in high-income countries, with expansion mainly occurring in upper-middle-income economies. This results in a significant disparity in data center capacity. To bridge this digital divide, it is crucial to increase investments in data centers in low-income economies.

The report examines the growth drivers of cloud and data infrastructure in emerging markets, including business models, policies, and regulatory environments. It highlights the challenges faced by low- and middle-income economies in attracting investments in these areas.

Creating an environment conducive to private investment in cloud and data infrastructure requires a stable business environment, a skilled workforce, clear regulations, and reliable, affordable energy and broadband. Efforts should also aim to reduce the time from concept to launch of cloud infrastructure, simplify access to land and water resources, and prioritize sustainability to minimize the environmental impact through regulations and incentives.

Financial Stability Institute

• Almost all financial authorities have ongoing suptech initiatives that are focused on four broad areas: data visualisation, regulatory reporting, financial risk assessment and supervisory automation.
• Due to organisational, legal or infrastructure constraints, financial authorities rely mostly on internal resources in building suptech solutions and much less on private vendors or collaborations with other authorities. If financial authorities engage with suptech vendors, it is mainly with regard to developing regulatory reporting solutions.
• Suptech vendors are generally optimistic about the future direction of the suptech market despite its inherently small size. However, they find it challenging to engage with financial authorities because they do not have a clear view of the authorities' needs, complex procurement processes and organisational siloes.
• Therefore, there is room to improve private sector involvement and collaboration with other authorities in the development and adoption of suptech solutions. This would entail facilitating transparency in suptech requirements, simplifying internal processes and establishing infrastructure and policies that are more conducive to secure collaboration.

The report reviews the use of key innovative technologies across various aspects of the banking value chain, including application programming interfaces, artificial intelligence and machine learning, distributed ledger technology and cloud computing. It also considers the role of new technologically enabled suppliers (eg big techs, fintechs and third-party service providers) and business models.

While digitalisation can benefit both banks and their customers, it can also create new vulnerabilities and amplify existing risks. These can include greater strategic and reputational risks, a larger scope of factors that could test banks' operational risk and resilience, and potential system-wide risks due to increased interconnections. Banks are implementing various strategies and practices to mitigate these risks, but effective governance and risk management processes remain fundamental.

Digitalisation raises regulatory and supervisory implications for both banks and supervisors. These include:

• monitoring evolving risks and adopting a responsible approach to innovation;
• safeguarding data and implementing robust risk management processes; and
• securing the necessary resources, staff and capabilities to assess and mitigate risks from new technologies and business models

(Document in Spanish)

The Report provides a global snapshot across several facets of supervisory technology (suptech), including underpinning digital infrastructure and technologies, supported supervisory use cases, approaches employed for developing and deploying suptech applications, and the related challenges and risks. It also presents year-to-year analysis using data from the State of SupTech Survey 2022.

The State of SupTech Report 2023 focuses on how the development and implementation of suptech is evolving across the globe, extracting insights from the information provided by 64 financial authorities such as central banks, securities and capital market authorities, financial conduct authorities, and insurance supervisors from six continents. This year’s survey leverages the 2022 Report as a baseline to provide a picture of emerging trends, persisting and new challenges, maturing strategies, and attained impacts. Compared to last year, the 2023 survey included five times more questions, allowing for a substantially more detailed and expansive analysis, with the trade-off of having a smaller sample size of respondents.

(Document in Spanish)

The financial sector is highly exposed, and a severe cyber incident could pose macro-financial stability risks through a loss of confidence, disruption of critical services, and spillovers to other institutions through technological and financial linkages. While better cyber legislation and cyber-related governance arrangements at firms can help mitigate these risks, cyber policy frameworks remain generally inadequate, especially in emerging market and developing economies. Thus, the cyber resilience of the financial sector needs to be strengthened by developing adequate national cybersecurity strategies, appropriate regulatory and supervisory frameworks, a capable cybersecurity workforce, and domestic and international information-sharing arrangements.

To allow for more effective monitoring of cyber risks, reporting of cyber incidents should be strengthened. Supervisors should hold board members responsible for managing the cybersecurity of financial firms and promoting a conducive risk culture, cyber hygiene, and cyber training and awareness. To limit potential disruptions, financial firms should develop and test response and recovery procedures. National authorities should develop effective response protocols and crisis management framework.

The FSB Guidance on Arrangements to Support Operational Continuity in Resolution, originally published in 2016, sets out arrangements to support the continuity of those services in the event of resolution. The guidance assists supervisory and resolution authorities and financial institutions to evaluate whether financial institutions that are subject to resolution planning requirements have appropriate arrangements to support operational continuity if the firm enters resolution. It covers legal, contractual and governance frameworks, resourcing, management information systems and financial resources.

As part of the digitalisation of the financial services sector, financial institutions have increased their dependencies on third-party service providers in supporting critical shared services in recent years. This can bring multiple benefits to financial institutions, including flexibility, innovation and improved operational resilience. However, if not properly managed, disruption to critical shared services could affect the continued provision of critical functions, posing risks to orderly resolution and, in some cases, financial stability.

The 2016 Guidance has been issued to include a supplementary note on the digitalisation of critical shared services as an addendum. The supplementary note does not create any new guidance or requirements. Rather, it specifies, for each section of the 2016 Guidance, how authorities and firms should think about the continuity of critical shared services in resolution when those services are digital.

CCDRs highlight the potential for development and resilience to reinforce each other, with resilient economies better equipped to handle climate shocks. They also point out numerous cost-effective adaptation strategies with high economic and social returns. Additionally, the reports show that prioritizing low-emission development pathways can deliver similar or even faster economic growth compared to traditional approaches, but achieving this requires the right enabling environment, well-designed policies, and support from the international community.

Significant investments are needed to achieve resilient, low-emission development, with the private sector playing a crucial role. There is a need for well-coordinated efforts across various sectors and international cooperation.

Capturing the opportunities identified in CCDRs requires tackling challenges like governance and inefficient resource allocation. The reports suggest ways for countries to strengthen their legal frameworks and optimize resource spending, including repurposing subsidies. Overall, CCDRs provide valuable insights for governments, stakeholders, and the World Bank to prioritize actions, investments, and knowledge sharing, ultimately contributing to a world free from poverty on a livable planet.

The 13th edition of this joint report is based on survey data from 86 banks across 37 countries and highlights the issues chief risk officers (CROs) view as the most pressing for their organizations now, and in the future.

The joint survey report, entitled Managing through persistent volatility: the evolving role of the CRO and the need for organizational agility, finds that today’s CROs face increased complexity caused by overlapping and correlated risks, nearly all of which seem to be increasing in urgency. In the short term, nearly three out of four CROs identified cybersecurity risk as their top concern over the next 12 months (73%), in addition to two-thirds (66%) of respondents naming liquidity risk as the top financial risk for the next year.

When it comes to the top risk over the next five years, global banking CROs see climate and nature-related risk, the use of machine learning and artificial intelligence and industry disruption due to new technologies as the biggest priorities.