WOCCU Urges Continued Credit Union Access to Central Clearing of OTC Derivatives.

WOCCU made numerous recommendations that will allow credit unions to continue to have access to central clearing of over-the-counter derivatives.  In particular WOCCU urged a reduction in Basel III’s capital requirements for issuers and clearers of interest-rate swaps and caps to help better ensure continued access to interest rate derivatives for credit unions.  Without changes to these rules, the banks’ cost of capital for issuing or clearing interest rate derivatives may result in the banks dropping credit unions and other smaller derivatives users as clients.

The comments were filed in response to the Financial Stability Board (FSB), the Basel Committee on Banking Supervision (BCBS), the Committee on Payments and Market Infrastructure (CPMI) and the International Organization of Securities Commissions’ (together “the Committees”) Consultative Document: Incentives to centreally clear over-the-counter (OTC) derivatives.

A copy of the letter can be viewed here.

Financial Stability Board

Basel Adopts WOCCU Recommended Approach in Pillar 3 Disclosure Requirements

WOCCU’s recommended approach of limiting application of the Total Loss-Absorbing Capacity (TLAC) requirements at resolution group level to internationally active banks or global systemically important banks (G-SIBs) was adopted by The Basel Committee on Banking Supervision (Committee) today in its technical amendment on additional Pillar 3 disclosures requirements.  These requirements are for those jurisdictions implementing an expected credit loss (ECL) accounting model as well as for those adopting transitional arrangements for the regulatory treatment of accounting treatment.   

WOCCU filed its comment letter earlier this year urging this approach noting that such an approach would be an appropriate proportional regulatory approach vis-à-vis reporting compliance burdens for credit unions. 

A copy of the Committee’s technical amendment on additional Pillar 3 disclosure requirements can be viewed here.


WOCCU Comments Included in IFAC’s Roadmap on Strengthening Accounting Standard Setting Process

WOCCU input is reflected in the International Federation of Accountants’ (IFAC) “Perspectives on the Way Forward for Strengthening the Oversight and Operations of the International Audit & Assurance and Ethics Standards Boards”, which provides a roadmap for developing high-quality international accountancy standards.

The Monitoring Group (MG) has been reviewing the international standard setting process since early 2015 and most recently published a consultation paper outlining possible actions. WOCCU provided input into this consultation urging inclusion of a “multi-stakeholder” approach to help the board develop standards that better serve the public interest and are relevant to all types of business enterprises including credit unions. 

The report is designed to set out perspectives on the way forward to strengthen the oversight and operations of the standards boards responsible for audit & assurance and ethics.  While this report does not include an agreed Public Interest Framework (PIF), it does provide a roadmap to advance consensus noting the following:

  • Broad support and agreement for a Public Interest Framework (PIF) is important to provide a firm foundation on which to base any significant changes to the model.
  • A multi-stakeholder approach to achieve consensus is essential; and
  • Improvements will need to be appropriately funded, but a new, viable, diverse funding model has not yet been proposed or agreed.

The report further notes that although the current process produces standards that are regarded as high quality and credible, improvements are needed in the following areas:

  • Clarifying the distinct roles between oversight and standards development;
  • Enhancing multi-stakeholder representation on both the oversight body and the standards boards;
  • Improving the timeliness of standards development while retaining their quality and relevance; focusing on standards related to auditor performance; quality management within firms; the implications of new accounting standards; and emerging areas of reporting and new technology;
  • Addressing the perception that the accountancy profession is able to exert undue influence; and
  • Increasing the funding sources to support the proposed improvements above, and to ensure sufficient, sustainable, and preferably diverse funding for the future

A copy of the report can be viewed here.

The Monitoring Group

WOCCU Urges Proportionality in FSB's Cyber Lexicon Initiative

The World Council of Credit Unions urged the Financial Stability Board (FSB) to take a proportional regulatory approach in its cybersecurity guidance so as to not impose an unreasonable compliance burden on community-based financial institutions, such as credit unions.  These comments came as part of World Council's comments on FSB's Consultative Document on Cyber Lexicon.

World Council supported FSB's initiative to develop a Cyber Lexicon and to address cyber security and cyber resilience in the financial sector as well as supporting the draft lexicon and the criteria used to develop it. 

A copy of the letter can be viewed here

Financial Stability Board

Basel Adopts WOCCU Recommended Amendment to Treatment of Net Stable Funding Ratio

The Basel Committee on Banking Supervision adopted a WOCCU recommended change to the treatment of extraordinary monetary policy operations in teh Net Stable Funding Ratio (NFSR).The amendment to the NSFR allows reduced required stable funding factors for central bank claims with a maturity of more than six monghts, subject to a floor of 5%.  The amendment will provide greater flexibility in the treatment of extraordinary central bank liquidity absorbing monetary policy operations. 

WOCCU urged the adoption of this amendment in its comment letter to the Basel Committe. 

A copy of the technical amendment can be viewed here, and WOCCU's comment letter can be viewed here

WOCCU Supports Simplified Alternative in Basel Committee Standard on Capital Requirements

World Council supports many aspects of the Basel Committee on Banking Supevision's (Committee)  proposal to establish a “Simplified Alternative” to Basel III’s standardised approach to market risk capital requirements, which would apply to less complex banking institutions.The proposal that would exclude asset-size or trading-book-size limitations that would otherwise restrict an institution's eligibility to use the Simplified Alternative should provide regulatory relief for most credit unions.

WOCCU filed its comment letter to the Committee's Consultative Document:  Revisions to the minimum capital requirements for market risk.

A copy of the letter filed by WOCCU can be viewed here.


WOCCU on Capitol Hill Urging Congress to Support Credit Union Development Efforts

The World Council of Credit Unions (WOCCU) was active on Capitol Hill today urging Congress to support credit union development efforts.  Michael Edwards, General Counsel and Andy Price, Regulatory Counsel for WOCCU were present at the Senate Foreign Relations Committee that heald a hearing entitled "USAID Resources and Redesigns" wherein The Honorable Mark Green, Administrator for the Unites States Agency for International Development testified on issues surrounding the deployment of funds by the agency.

The Credit Union National Association submitted a letter touting the success of WOCCU with past development projects and urging Congress to priortize procurement reforms that level the playing field for smaller development contractors such as credit unions.

A copy of the letter can be viewed here.


Proportionality Urged by WOCCU in Basel Pillar 3 Updated Framework

WOCCU urged the Basel Committee on Banking Supervision to emphasize that prudential regulators should consider proportionality when implementing Pillar 3 Disclosure Requirements in the Updated Framework so as to not subject less complex institutions with a lower risk profile to unnecessary disclosures.

These comments were made in WOCCU's recent comment letter on the Basel Committee's Consultative Document:  Pillar 3 Disclosure Requirements – Updated Framework WOCCU further supported finalization of the standard that limits the scope of most aspects this standard to “internationally active banks at the top consolidated levels”, which would in effect, exempt most credit unions from the most onerous aspects of the proposal.

A copy of the letter can be viewed here.


Basel Committee Finalizes Standards on Simple, Transparent and Comparable Short-Term Securitisations

The Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) finalized, in two separate issuances, both the Criteria for Identifying and the Capital Treatment for simple, transparent and comparable (STC) short-term securitisations.

WOCCU supported much of the proposal but urged various changes on both the Capital Treatment and the Criteria proposals designed to assist credit unions in the development of simple, transparent, and comparable short-term securitisations.

Key changes included in the final standard include reducing the minimum performance history for non-retail and retail exposures at five years and three years, respectively, and clarifying that the provision of credit and liquidity support to the asset-backed commercial paper structure can be performed by more than one entity, subject to certain conditions.  Finally, WOCCU recommended changes were made to clarify that the criteria do not automatically exclude equipment leases and auto loan and lease securitisations from the short-term STC framework.

The final proposal on the Capital Treatment can be viewed here and the final proposal on the Criteria can be viewed here.


WOCCU Urges Proportionality for Credit Unions in Basel Pillar 3 Disclosures

WOCCU urged the Basel Committee to adopt a proportional regulatory approach in its recent comment letter on the Basel Committee on Banking Supervision's Technical Amendment: Pillar 3 Disclosure Requirements – Regulatory Treatment of Accounting Provisions.

Specifically with  the accounting for the credit quality of assets, WOCCU urged limiting reporting burdens for non-complex, community-based financial institutions by not allowing country-level disclosures for the geographic breakdown required under the disclosure.  This would reduce the compliance burden on most credit unions.

Further, WOCCU urged omitting Total Loss-Absorbing Capacity (TLAC)-related measures from a credit union's Pillar 3 disclosures for a credit union that is not required to issue TLAC instruments.

A copy of the letter can be found here.


Proportionality in Stress Testing Urged by WOCCU to Basel Committee on Proposal

World Council urges the Basel Committee on Banking Supervision (Committee) to adopt the principle of proportionality in its proposal on stress testing principles in its comment letter.  The Committee recently opened for comment its Consultative Document: Stress Testing Principles wherein it is moving to a shorter, higher-level articulation of existing principles which will allow for a more robust development of stress testing practices. WOCCU members have often reported “gold-plating” and excess supervision involving stress testing.  Accordingly, World Council is urging the Committee to finalize this standard in a manner that ensures that supervisory practices required for stress testing are commensurate with the risk profile and systemic importance of the supervised entity and to ensure credit unions are not unduly burdened by unnecessary oversight.

A copy of the letter can be viewed here.


IADI Urged to Consider Credit Union Deposit Insurance Schemes in Setting Ratios

World Council of Credit Unions (World Council) filed its comment letter on the International Association of Deposit Insurers on the Association’s draft research paper Deposit Insurance Fund Target Ratios.  WOCCU included information on the National Credit Union Share Insurance Fund (NCUSIF) in the United States, the United Kingdoms’ Financial Services Compensation Scheme (FSCS), and Canadian provincial deposit insurance funds noting that including these successful approaches taken by the respective schemes, albeit different in their approaches, can help inform the IADI’s future work on deposit insurance fund target ratios.  

The letter notes that these funding structures strike an appropriate balance vis-à-vis the costs of levies versus pro- and counter-cyclality versus maintaining readily available funds to pay for insurance losses.

A copy of the letter can be viewed here.


WOCCU Applauds Efforts to Reduce De-Risking

The Basel Committee on Banking Supervision (Basel Committee), the Committee on Payments and Market Infrastructures (CPMI), the Financial Action Task Force (FATF) and the Financial Stability Board (FSB) announced their endorsement of the Wolfsberg Group’s publication of the Correspondent Banking Due Diligence Questionnaire to help address the decline in the number of correspondent banking relationships. The questionnaire aims to standardize the collection of information that correspondent banks ask from other banks when opening and maintaining these relationships which should alleviate the need for correspondent banks to “de-risk” otherwise viable financial institutions from their customer base.  This “de-risking” has been a source of concern for credit unions and can impact their ability to send and receive international payments or connect to various payment flows. 

WOCCU is pleased to see this development as it has long advocated for measures to reduce de-risking including supporting using the Wolfsberg Group Questionnaire (See letter to the Basel Committee from February 2017).  Additionally, WOCCU engaged with FATF (See July 2017 letter, April 2017 letter, and August 2016 letter) for measures to address the issue.  This endorsement is welcome news and should assist credit unions with their correspondent banking relationships.


WOCCU Urges Basel Committee to Consider Credit Union Difference for Treatment of Sovereign Exposures

WOCCU filed its comment letter on the Basel Committee on Banking Supervision’s (Committee) discussion paper The Regulatory treatment of sovereign exposures.  This discussion paper is derived from a report from by a high-level Task Force on Sovereign Exposures set up by the Committee to review the regulatory treatment of sovereign exposures and recommend potential policy options.

In its letter WOCCU urged the following:

  • The establishment of a 0% risk-weight for domestic-currency central government exposures, including for exposures to central-government public sector entities (PSEs) that meet the Committee’s “support criteria,” as a general policy matter,or alternatively, to continue to permit 0% risk-weightings for domestic sovereign exposures as a national discretion.  WOCCU notes that existing Basel III reserve requirements already adequately control for the risks of a domestic sovereign default in a proportional manner;
  • Opposition to the imposition of a marginal risk weight add-on approach for domestic sovereign exposures and urged the Committee to limit any marginal risk weight add-on rules to apply only to foreign sovereign exposures. Because credit unions and other community-based depository institutions are usually subject to portfolio shaping rules that limit their permissible investments to loans, deposits in other depository institutions, and debt instruments guaranteed by a domestic sovereign, additional risk weights are not warranted;
  • Opposition to requiring credit unions to stress test the creditworthiness of their exposures to domestic sovereigns;
  • Consideration of dividing sovereign exposures into three or more classes that are not reliant on credit ratings per se, such as: (a) domestic sovereign exposures (which present lower credit risks than foreign sovereign exposures); (b) “investment grade” foreign sovereign exposures; and (c) “non-investment grade” foreign sovereign exposures.

A copy of the letter can be viewed here.


WOCCU Urges EC to Support Credit Union Lending to SMEs

WOCCU filed its comment letter to the European Commission's (EC) Public consultation on EU funds in the area of investment, research & innovation, SMEs and single market. noting that credit unions can play a vital role in supporting the economy by providing sources of business credit to local communities and Small and Medium-sized Enterprises (SMEs).  The benefits to a local community from credit union lending can be significant such as through programs like the Competitiveness of Enterprises and Small and Medium-sized Enterprises (COSME).

WOCCU urged the consideration of credit union's role in this consultation which is analyzing various programs for consideration of forming the budget for the EU.

A copy of the letter can be found here.

European Commission

ENCU Urges EC to Provide Relief for Credit Unions in Regulatory Reporting

The European Network of Credit Unions submitted its comment letter to the European Commission in response to its Consultative Document:  Fitness Check on Supervisory Reporting.  In its letter ENCU urged the European Commission to reduce regulatory burden by considering the size, complexity, and structure of credit unions when simplifying and streamlining the supervisory reporting requirements.

In particular ENCU recommended that the EC consider the differing rulebooks under which credit unions operate noting that many times those regulations are significantly more stringent than those operating under CRD IV and CRR.  Further, given that credit unions are not-for-profit, member owned institutions run by volunteer boards and volunteer employees, that compliance burdens and costs often fall disproportionately on credit unions.

ENCU urged the EC to tailor any changes with an eye towards easing the compliance burden and reducing any costs associated with such changes.

A copy of the letter can be viewed here.

European Commission

Basel Committee Adopts Fintech Guidance that Includes WOCCU Input

The Basel Committee on Banking Supervision (Committee) published its paper titled Sound Practices on the implications of fintech developments for banks and bank supervisors which assesses how technology-driven innovation may affect the banking industry and banding prudential supervisors. 

The Committee’s final fintech paper reflects WOCCU’s comments on the Committee's August 2017 consultative document including that fintech companies be subject to comprehensive prudential, consumer protection, data security and anti-money laundering/countering the financing of terrorism (AML/CFT) regulation and urging the Committee to promote a regulatory level playing field by ensuring that fintech companies are subject to the same regulatory requirements that apply to authorized deposit-taking institutions such as banks, credit unions, and building societies

In particular the paper contains the following standards for fintech companies advocated by WOCCU:

  • Safety and soundness and financial stability can be enhanced by implementation of supervisory programmes to ensure that banks have effective governance structures and risk management processes that appropriately identify, manage and monitor risks arising from the use of fintech including associated new business models applications, processes or products; 
  • Safety and soundness and financial stability can be enhanced by implementation of supervisory programmes to ensure that banks have appropriate risk management practices and processes over any operation outsourced to or supported by a third party, including fintech firms, and that controls over outsourced services are maintained to the same standard as those applied to operations that the bank itself conducts; and 
  • Where appropriate, safety and soundness and financial stability can be enhanced by bank supervisors communicating and coordinating with relevant regulators and public authorities, such as those charged with data protection, consumer protection, fair competition and national security, to ensure that banks using innovative technologies are complying with the relevant laws and regulations.

WOCCU Actively Monitoring IASB Work Plan

The International Accounting Standards Board (IASB) issued their new work plan at the end of January containing a number of items relevant to credit unions this year.  A thorough summary of the January IASB meeting, containing numerous details can be found here.

Of particular interest to credit unions are the following:

  • IASB will finish the Conceptual Framework in March.  This is the primary accounting standard on defining equity versus liabilities, and could impact the ability of cooperatives to use shares as equity;
  • The IASB will issue a Discussion Paper in the Second Quarter of 2018 called Financial Instruments with Characteristics of Equity, which may also address when credit union shares and cooperative shares qualify as equity on an accounting basis (assuming this is not addressed in the Conceptual Framework); 
  • IASB is planning Discussion Papers or Exposure Drafts (similar to proposed rules) on requirements for primary financial statements—including, according to the IASB meeting summary, requiring companies to disclose their key management performance measures, as well as proposals on management commentary and disclosure requirements; and
  • IASB is also planning to issue a research summary paper on share-based payments, which indicates that they are considering changes to the rules on dividends.  This item may or may not affect credit unions based on the share-based dividends aspect.

WOCCU will closely monitor these items as they evolve throughout the year and will continue to ensure that the credit union/cooperative perspective is considered at each step of the process.

International Accounting Standards Board

WOCCU Urges Changes in Oversight of International Audit-Related Standard-Setting Boards

WOCCU filed its comment letter on the Monitoring Group’s proposal on Strengthening the Governance and Oversight of the International Audit-Related Standard-Setting Boards in the Public Interest

The Monitoring Group is a group of international financial institutions and regulatory bodies committed to advancing the public interest in areas related to international audit standard setting and audit quality. The members of the Monitoring Group are the Basel Committee on Banking Supervision, European Commission, Financial Stability Board, International Association of Insurance Supervisors, International Forum of Independent Audit Regulators, International Organization of Securities Commissions, and the World Bank.

WOCCU makes numerous suggestions for changes to the proposal as follows:

  • Supports increasing the independence of auditing standard setting from the accounting profession, but does not support issuing new auditing standards more frequently;
  • Urges the Monitoring Group to require standard setters to utilize quantitative cost benefit analyses as part of their consultative processes, and also to considering seriously the comments of community-based cooperative depository institutions, to help reduce regulatory burdens on financial cooperatives;
  • Supports the proposal for a “multi-stakeholder” international audit standard setting board that includes board members who are not accountants per se but have relevant industry experience, such as being a representative of a community-based depository institution trade association or a community-based depository institution prudential regulator;
  • Opposes the proposal that international standards be adopted through majority vote; 
  • Proposes reforming the auditing standard Consultative Advisory Group (CAG) by including a broader multi-stakeholder composition in the Consultative Advisory Group that would better serve the public interest by helping to develop standards that are more relevant and practical for a wider diversity of business enterprises, including cooperative depository institutions; 
  • Supports giving the PIOB authority to veto auditing standards or challenge technical judgments when doing so is necessary for the PIOB to discharge its responsibility to ensure that auditing standards are in the public interest; and 
  • Supports retention of the Monitoring Group’s current oversight role over how international audit-related standards are developed. 

 A copy of the letter can be viewed here.

The Monitoring Group

WOCCU Supports Basel Committee Flexibility in Treatment of Liquidity-absorbing Monetary Policy Operations in the NSFR

WOCCU filed its comment letter on the Basel Committee’s technical amendment related to the treatment of extraordinary monetary policy operations in the Net Stable Funding Ratio.

In its letter, WOCCU voiced its support for the following:

  1. Reducing depository institutions’ Required Stable Funding (RSF) liquidity reserves to as low as a five percent RSF reserve factor for institutions’ claims on a central bank related to the central bank’s extraordinary “liquidity-absorbing operations,” including secured transactions with a residual maturity of more than six months.
  2. Providing depository institutions supervisors and central banks with increased flexibility vis-à-vis exceptional central bank operations to help promote financial stability, whether those exceptional central bank operations are to provide emergency liquidity or are to absorb excess liquidity in the banking system; and
  3. Providing a reduced RSF reserve factor for instruments used as collateral in connection with exceptional central bank liquidity operations.

A copy of the comment letter can be viewed here.


WOCCU Urges FSB to Consider Cooperative Structure on Proposals on Resolution Regimes

The World Council of Credit Unions filed two comment letters with the Financial Stability Board (FSB) on their two Consultation Documents on Key Attributes of Effective Resolution Regimes:  1. Principles on Bail-in Execution; and 2. Funding Strategy Elements of an Implementable Resolution Plan

FSB Bail-In Principles Proposal:

On the FSB Principles on Bail-in Execution WOCCU:

  1. Urges the FSB to limit these requirements to systemically important banks only;
  2. Argues that the FSB should respect the cooperative structure and not require a change in the coop’s ownership and control even in the event of a “bail-in”;
  3. Urges the FSB allow supervisors and institutions the option to engage more than one valuation firm to value its assets;
  4. Argues the FSB should not require community-based depository institutions to invest in computer programs that provide “highly granular” information about their assets and liabilities; and
  5. Cautions that public communications by supervisors concerning troubled financial cooperatives should be carefully crafted so as not to cause a run on that institution or on other financial cooperatives, especially since credit unions and other financial cooperatives are privately held by their member-depositors (so it is not necessary to issue communications to a broader “market” as would likely be necessary for a publicly traded systemically important bank).

FSB Resolution Funding Strategies Proposal: 

WOCCU urged the FSB to apply the proposed funding strategy only to systemically important banks.  Further WOCCU discusses information sharing between institutions and supervisors and provides examples of how cooperative depository institutions systems have handled past resolutions, such as the US “corporate credit unions crisis” of 2009, without demutualizing, such as by using private stabilization funds or temporary public-sector stabilization funds.

A copy of the Bail-In Principles Comment Letter can be viewed here and the Resolution Funding Strategies Proposal Comment Letter can be viewed here.

Financial Stability Board

WOCCU's Top 10 Advocacy Successes of 2017

WOCCU, on behalf of its members, is pleased to share its Top 10 Advocacy Successes of 2017.  Among the numerous successes are the following:  1. Reduced Capital Requirements for Most Mortgages; 2. Capital Add-Back for Expected Credit Loss Accounting Reserves; 3. Ending Correspondent Bank "De-Risking" with Clearer Anti-Money Laundering Rules; and 4. Reduced Operational Risk Reserves for community-Based Depository Institutions.

The full list of the Top 10 Advocacy Successes of 2017 can be viewed here.

Agreement Reached to Strengthen EU Rules on Money Laundering and Terrorist Financing

The European Union (EU) Ambassadors have confirmed a political agreement between the presidency and the European Parliament to amend the EU rules to prevent money laundering and terrorist financing. This is part of the trilogue process and will now move to the Parliament and Council for adoption.

The draft directive is intended to prevent the use of the financial system for the funding of criminal activities, and to strengthen transparency rules to prevent the large-scale concealment of funds

The main changes to directive 2015/849 include the following:

  1. Enhanced access to beneficial ownership registers, so as to improve transparency in the ownership of companies and trusts. The registers will be interconnected to facilitate cooperation between member states with public access to beneficial ownership information on companies; access to beneficial ownership information on trusts and similar arrangements based on a “legitimate interest”; access upon written request to beneficial ownership information on trusts that own a company that is not incorporated in the EU. Member states can provide for greater access.
  2. The threshold for identifying the holders of prepaid cards is lowered from €250 to €150, and customer verification requirements are extended. Virtual currency exchange platforms and custodian wallet providers will have to apply customer due diligence controls, ending the anonymity associated with such exchanges;
  3. Improved cooperation between the member states' financial intelligence units. FIUs will have access to information in centralised bank and payment account registers, enabling them to identify account holders;
  4. Improved checks on risky third countries. The Commission has established and regularly updates a harmonised list of non-EU countries with deficiencies in their anti-money laundering prevention regimes. Additional due diligence measures will be required for financial flows from these countries. The list builds on that established at international level by the Financial Action Task Force.

WOCCU has been active in shaping these regulations to ensure that the credit union perspective is adequately considered.  Namely, the following comment letters were filed during the process that served as a precursor to these amendments to the directive:

A copy of the press release, together with supporting documents, can be viewed here.

Basel III Slashes Capital Requirements for Most Mortgages, Operational Risk

The Basel Committee on Banking Supervision on December 7th issued the final version of Basel III with significant regulatory capital reductions for community-based financial cooperatives in the areas of residential mortgage lending and operational risk.  The final version of Basel III also preserves favorable treatment for non-mortgage loans to consumers and small businesses, but increases large banks’ capital requirements.  

“Credit unions, mutual banks and building societies around the world should save billions of dollars under these new Basel III reserve requirements, which respond to years of lobbying by World Council of Credit Union’s (WOCCU) for regulatory relief,” said WOCCU Vice President and General Counsel Michael Edwards.  ”The Basel Committee has also responded to our advocacy by making large banks subject to minimum capital requirements that are more in-line with the Basel capital rules applicable to community-based institutions, which will help level the regulatory playing field.”

WOCCU’s detailed summary of the final version of Basel III is available here.  The key points of the final Basel III standard for community-based financial cooperatives include:

  • The 75 percent of face value “regulatory retail” risk-weight for most non-mortgage loans to consumers and small businesses is preserved.  This category includes credit cards and other unsecured loans to consumers, consumer auto loans and leases, and business loans to small and medium-enterprises;
  • Operational risk reserves for virtually all community-based financial cooperatives will be reduced by roughly 20 percent compared to Basel II.  Larger institutions’ operational risk reserves will typically be higher than under Basel II;
  • Residential mortgage-loan risk weights are reduced by between 5 and 15 percentage points—translating to a capital reduction of between roughly 14 percent and 43 percent per loan—for residential mortgages with at least 20 percent equity or which have mortgage insurance or a guarantee.  These final risk weights are significantly lower than Basel II’s requirements as well as lower than the Committee’s proposal, which would have only reduced mortgage capital requirements for mortgages with at least 40 percent equity;
  • For mortgage insurance or guarantees, the risk weighting for the guaranteed amount can be as low as 0 percent if the guarantor is a government-sponsored enterprise, or as low as 20 percent in the case of private mortgage insurance;
  • Mortgages for second homes or investment properties are treated as owner-occupied residential mortgages for regulatory purposes unless more than 50 percent of the funds needed to pay the mortgage come from rental income;
  • For second-home or investment-property mortgages that are materially dependent on rental income, the final risk weightings are usually 30 to 45 percent of face value so long as the loan has at least 20 percent equity.  This is a significant concession from the Basel Committee’s proposed 70 to 120 percent risk-weight for most second-home or investment-property mortgages;
  • Large banks will be subject to a new “capital floor” that will not allow them to reduce their capital requirement to less than 72.5 percent of what their capital requirements would be under the Basel III standardized approach.  Basel II had no capital floor and World Council advocated strongly for the Committee to establish one for big banks;
  • Global Systemically Important Banks will have a higher leverage ratio requirement than other institutions; and

 The compliance dates for the revised standardized approaches to credit risk and operational risk are delayed from January 2019 to January 2022.


Agreement Reached on the Finalisation of the Basel III Framework

The Group of Central Bank Governors and Heads of Supervision (GHOS), the oversight body of the Basel Committee on Banking Supervision, announced that agreement has been reached on the finalisation of Basel III. The agreement improves the comparability of banks’ risk-weighted assets and reinforces the credibility of the bank capital framework. Agreement on these final elements means that key reforms pursued to address the causes of the global financial crisis has now been completed and can be fully implemented.

The reforms include the following elements: 

  • an aggregate output floor, which will ensure that banks' risk-weighted assets (RWAs) generated by internal models are no lower than 72.5% of RWAs as calculated by the Basel III framework's standardised approaches. Banks will also be required to disclose their RWAs based on these standardised approaches. (Advocated for by WOCCU which should help level the competitive playing field for credit unions and other community-based financial cooperatives          
  • a revised standardised approach for credit risk, which will improve the robustness and risk sensitivity of the existing approach;
  • revisions to the internal ratings-based approach for credit risk, where the use of the most advanced internally modelled approaches for low-default portfolios will be limited;
  • revisions to the credit valuation adjustment (CVA) framework, including the removal of the internally modelled approach and the introduction of a revised standardised approach;
  • a revised standardised approach for operational risk, which will replace the existing standardised approaches and the advanced measurement approaches;
  • revisions to the measurement of the leverage ratio and a leverage ratio buffer for global systemically important banks (G-SIBs), which will take the form of a Tier 1 capital buffer set at 50% of a G-SIB's risk-weighted capital buffer; and

A summary of the agreed reforms can be found in the summary document and the final text can be viewed here.  The revised standards will take effect from January 1, 2022 and will be phased in over five years. 

Bank of International Settlements