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US Treasury notes AI’s risk to financial stability - Industry roundup: 18 December

US Treasury notes AI’s risk to financial stability

The US Treasury’s Financial Stability Oversight Council has unanimously approved its 2023 annual report, which reviews financial market developments, describes potential emerging threats to US financial stability, identifies vulnerabilities in the financial system, and makes recommendations to mitigate those threats and vulnerabilities.

For the first time, the Council has identified the use of AI in financial services as a vulnerability in the financial system.  Financial institutions have rapidly adopted innovative technologies in recent years, and the use of AI in financial services has increased.  AI offers potential benefits, such as reducing costs, improving efficiencies, identifying complex relationships, and improving performance and accuracy.  However, using AI can introduce certain risks, including safety-and-soundness risks like cyber and model risks.

The Council notes that existing requirements and guidance may apply to AI and recommends monitoring the rapid developments in AI to ensure that oversight structures account for emerging risks to the financial system while facilitating efficiency and innovation.  The report recommends financial institutions, market participants, and regulatory and supervisory authorities deepen their expertise and capacity to monitor AI innovation and usage and identify emerging risks.

The report also included recommendations around banking, non-bank financial intermediaries, climate-related financial risk, cybersecurity and digital assets.

“The resilience of the US financial system in the face of this year's global economic uncertainty and the banking sector distress of the spring is a testament to the reforms implemented in the aftermath of the global financial crisis,” said Janet Yellen, Secretary of the Treasury. “Events over the past year continue to underscore the importance of the Council’s ongoing efforts to enhance the resilience of the financial system and monitor a wide range of vulnerabilities.” 


Fossil fuels phaseout evades COP28 but pressure on carbon-intensive entities builds

The 2023 United Nations Climate Change Conference (COP28), which concluded in Dubai on 13 December, generated many commitments across the public and private sectors. A report from Moody’s Investor Services outlined that these included pledges to triple installed renewables capacity by 2030 and reduce methane emissions, commitments by multilateral development banks (MDBs) to scale up climate finance for emerging markets (EMs) and the operationalisation of a loss and damage fund.

While the final agreement included a call to transition away from fossil fuels, it stopped short of committing to their phaseout. Progress on these pledges will raise carbon transition risks for certain highly exposed entities while reducing the long-term impact of climate change, the Moody’s report noted. However, the ultimate credit implications of the commitments will be determined by how and when policymakers and investors translate them into action.

COP28 marked the conclusion of the first global stocktake, underscoring that current climate policies are not aligned with Paris Agreement targets. Pledges at the summit on renewables, energy efficiency, and oil and gas sector commitments on methane and flaring will narrow the gap. The agreements to accelerate efforts toward net zero emissions energy systems by mid-century and to transition away from fossil fuels to achieve net zero by 2050 reinforce increasing momentum to decarbonise the global economy. However, the application of policy lags what would be needed to achieve net zero pledges and raises the risk of more disruptive policy action down the road, the report found.

The summit also featured numerous commitments from public and private sector participants to scale investment in adaptation and mitigation financing, particularly for EMs. These included mechanisms that increase the impact of MDB financing and announcements by private and blended funds that could help mobilize finance. However, the Moody’s report found that the funding gap remains considerable, creating obstacles for many EMs to achieve decarbonisation at scale.

Elsewhere, the report found that while the operationalisation of the loss-and-damage fund promised at COP27 will mitigate climate change's economic and social impact on the most vulnerable countries, the funding pledged at COP28 represents only a sliver of estimated financing needs. Adopting a framework for the global adaptation goal could promote additional technical and financial support for EMs.


Visa to acquire majority interest in Prosa to accelerate digital payments adoption in Mexico

Visa has entered into a definitive agreement to acquire a majority interest in Prosa, a payments processor in Mexico, with the aim to accelerate the adoption of secure and innovative digital payments in the country. Under the agreement, Prosa will continue to operate as an independent company with its own technology infrastructure, while Visa looks to expand Prosa’s product offerings with new digital solutions, as well as share its experience and knowledge managing a global network and set of technology capabilities.

Prosa will continue commercially providing its brand-agnostic solutions, with its current leadership team continuing to lead the organisation. The transaction is subject to regulatory approvals and other customary closing conditions and is expected to close during the second half of 2024. Over the coming months, Visa will work closely with participants in the Mexican payment ecosystem, including regulators, current shareholders and the management and board of directors of Prosa, to ensure a smooth transaction closing.

Visa’s investment in Prosa is expected to enable global payments ecosystem players to take a more active role in Mexico’s payment landscape, increasing the possibilities for consumers and merchants. In addition, Prosa will be able to offer new benefits to Mexico’s payment ecosystem. Once the transaction closes, Prosa, working together with issuers and other participants in the payments market, will seek to promote such benefits among the cardholders in Mexico, including a plan to improve the technology that supports the brand-agnostic services offered by Prosa, as well as Visa brand services such as more tokenised payments. Prosa will also seek to push for new services such as the ability to send and receive payments in near real-time and technology that brings greater efficiency to payments, through Visa’s solutions.

Under the acquisition agreement, Prosa’s existing shareholders, including Banorte, HSBC Mexico, Invex, Santander Mexico, Scotiabank Mexico and Banjército, will continue to own the remaining portion of the company.


SAP and PayPal collaborate to simplify digital payments

SAP has announced it has expanded its integration with PayPal by creating a digital payments plug-in for the PayPal Braintree platform built on SAP Business Technology Platform (SAP BTP).

SAP BTP combines data and analytics, artificial intelligence, application development, automation and integration into one unified environment. Using SAP BTP to build its digital payments processing solution, PayPal can now offer a plug-in for SAP customers to manage payments easily online.

Many companies have seen increased business and compliance requirements for sending and receiving payments across organisations in recent years. As a result, digital wallets, automated clearing houses (ACH) and credit cards are being used for corporate transactions. With the PayPal Braintree Digital Payments connector, SAP customers can use all these funding sources to reduce costs and complexity.

The PayPal Braintree platform provides SAP customers with more payment choices. SAP customers who purchased the SAP digital payments add-on can connect to PayPal with the plug-in, now available from the SAP Help Portal site. Customers can benefit from increased efficiency, cost savings, security and transparency with the plug-in’s integration with SAP software environments certified through the SAP Integration and Certification Center.


BNP Paribas launches climate impact infrastructure debt fund

BNP Paribas has announced the launch of Climate Impact Infrastructure Debt, an initiative supported by the aligned commitments of BNP Paribas Asset Management (BNPP AM), BNP Paribas Corporate & Institutional Banking (BNPP CIB) and BNP Paribas Cardif to finance climate change mitigation.

Managed by BNPP AM’s Private Assets division, BNP Paribas Climate Impact Infrastructure Debt is structured as a Luxembourg Reserved Alternative Investment Fund (RAIF) and classified as Article 9 under SFDR.  The fund is targeting €500-750m from institutional investors, including BNP Paribas Cardif’s seeding commitment.  It will have an investment-grade profile and is expected to allocate to transactions in continental European countries, supporting energy transition projects that are in line with its investment philosophy by focusing on renewable energy, clean mobility and the circular economy, including new sectors such as batteries, hydrogen and carbon capture.

Three investments have already been secured for the fund, with financing for a low-carbon energy producer, a green-sourced district heating platform and a portfolio of onshore wind farms.

The collaboration within the BNP Paribas Group aims to ensure unique and scalable origination from the wider market and internal origination teams.  Sourcing capability will benefit from the origination capabilities of BNP Paribas’ Low Carbon Transition Group, with more than 200 dedicated investment professionals advising on and originating low carbon assets and an annual global origination over €20bn, together with BNPP AM’s track record of investment in infrastructure and sustainable finance.


Emirates NBD welcomes R3 to Digital Asset Lab council

Emirates NBD has announced R3 as a key council member of its Digital Asset Lab. R3 will join PwC and Fireblocks as the founding council members of the Lab.

The bank says this expansion demonstrates its continuing commitment to spearhead innovation in the financial sector with the help of cutting-edge solutions. With this addition to the Digital Asset Lab, Emirates NBD aims to strengthen the collaborative ecosystem by leveraging R3’s regulated markets expertise to drive transformative advancements in digital assets, currencies and banking services. 

The Digital Asset Lab was announced in May 2023 at the Dubai FinTech Summit to enable and accelerate digital asset and financial services innovation in the UAE. The Lab focuses purely on digital assets and how underlying technologies can be leveraged to enable customers to manage their financial services requirements effectively in the evolving and dynamic environment of digital assets.

“The region continues to go from strength to strength in global financial innovation, and the creation of the Lab marks another significant milestone in the growth of its burgeoning fintech sector,” commented David Rutter, Chief Executive Officer at R3.


British Business Bank launches asset-based lending variant of Recovery Loan Scheme

The British Business Bank has launched an asset-based lending variant of the Recovery Loan Scheme to broaden the support available for small businesses in the UK to access finance through the Recovery Loan Scheme.

The asset-based lending variant joins the existing term loan, revolving credit facility, invoice finance and asset finance variants, designed to support access to finance for UK businesses as they look to invest and grow.

The Bank’s Guarantee and Wholesale division worked with UK Finance and asset-based lenders to develop this variant and the innovation it will bring. Asset-based lending should allow lenders to provide loans secured by assets such as inventory, accounts receivable, equipment, or other property the borrower owns. Recovery Loan Scheme asset-based lending will be delivered by established asset-based lenders and the British Business Bank said it welcomes asset-based lenders to consider applying for accreditation.

“We wanted to diversify the support we provide for smaller businesses in the UK through the Recovery Loan Scheme, and we’re pleased to have made good on this promise with the launch of the asset-based lending variant,” said Reinald de Monchy, Managing Director, Guarantee and Wholesale Solutions, British Business Bank. “This innovation will unlock additional finance for UK smaller businesses, and we welcome any established asset-based lender to apply for this new product.”

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