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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.

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Basel

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. 

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Bank of International Settlements

Council of the European Union Adopts Creditor Hierarchy, IFRS 9/Large Exposures Rules

The Council of the European Union, as the final result of the trilogue process adopted two legislative acts on banking:

  1. a directive on the ranking of unsecured debt instruments in insolvency proceedings (bank creditor hierarchy); and
  2. a regulation on transitional arrangements to phase in the regulatory capital impact of the IFRS 9 international accounting standard.

The general points of the directive on the ranking of unsecured debt instruments are as follows:

  • It creates a new class of subordinated debt in banks' insolvency hierarchy which would be eligible to meet the internationally agreed TLAC standard for global banks
  • It provides a rapid transposition in to national legal systems, by January 1, 2019 at the latest
  • Contains grandfathering provisions to allow existing national systems and already issued debt instruments still to be valid where they fulfil the conditions

With respect to the phase-in of IFRS 9, its new impairment model may lead to an increase in expected credit loss provisioning and consequential fall in capital ratios.  The original proposal contained a 3-year transitional period, however, at the urging of WOCCU, the impact was mitigated to a 5-year transitional period.  In addition, transitional arrangements will ease the effects of an abrupt end to the exemption currently enjoyed by large exposures.

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Council of the European Union

Financial Stability Board Seeks Input on G-SIB Resolution Planning

The Financial Stability Board (FSB) issued for consultation two proposals for guidance on the implementation of its Key Attributes of Effective Resolution Regimes for global systemically important banks (G-SIBs), designed to address the “too-big-to-fail” institutions.

First is the consultation on Principles on Bail-in Execution referring to the write-down and/or conversion of liabilities into equity and helps implement a creditor-financed recapitalization as part of an orderly resolution that minimizes impacts on financial stability, ensures the continuity of critical functions, and avoids exposing taxpayers to loss.

The document proposes a set of principles covering:

  • disclosures on the instruments and liabilities within the scope of bail-in;

  • valuations to inform and support the application of bail-in;

  • processes to suspend or cancel the listing of securities, to notify creditors, and to deliver new securities or tradeable certificates following the entry into resolution;

  • securities law and securities exchange requirements during the bail-in;

  • processes for transferring governance and control rights and establishing a new board for the firm in resolution; and

  • market and creditor communications.

Second, the Consultation on Funding Strategy Elements of an Implementable Resolution Plan proposing guidance on the development of a plan for funding in resolution that builds on the FSB’s August 2016 Guiding Principles on the temporary funding needed to support the orderly resolution of a global systemically important bank (G-SIB) and existing supervisory and resolution guidance on liquidity risk management and resolution planning.

It identifies a set of key funding strategy elements covering:  1.  funding strategy capability; 2. a resolution funding plan by the authorities; 3. the use of firm assets and private sources of funding; 4. access to temporary public sector backstop funding mechanisms; and 5. information sharing and coordination between authorities. 

Comments are due to the FSB by February 2, 2018.

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Financial Stability Board

Monitoring Group Seeks Input on Reforms to Global Audit Standard Setting

The Monitoring Group, consisting of public authorities responsible for monitoring the international audit standard-setting process (the International Organization of Securities Commissions (IOSCO), the Basel Committee on Banking Supervision (BCBS), the European Commission (EC), the Financial Stability Board (FSB), the International Association of Insurance Supervisors (IAIS), and the World Bank Group (WBG)), has issued a consultation paper setting out options to enhance the independence, relevance and transparency of international audit standard setting in the public interest.

The consultation paper focuses on the governance and structure of the Standard Setting Boards (SSB) that support auditing as a public interest activity, namely the International Auditing and Assurance Standards Board and the International Ethics Standards Board for Accountants. The proposal is far-reaching, setting out the main areas of concern regarding the current structure and considering, among other matters, the number, remit and size of the SSBs and their staffs; the accountability of the SSBs to International Federation of Accountants (IFAC); the process for nominating members to the SSBs; the roles of the Public Interest Oversight Board and the Monitoring Group; and the means by which the structure is funded.

Comments on the Consultation are due February 9, 2018 and can be viewed here.

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Bank of International Settlements, The Monitoring Group

WOCCU Urges Changes to IADI Research on Resolution Tools

The World Council of Credit Unions (WOCCU) filed its comment letter with the International Association of Deposit Insurers on the Association’s draft research paper on Resolution Issues for Financial Cooperative: Overview of Distinctive Features and Current Resolution Tools urging numerous changes to the hierarchy of tools available for resolution of a troubled credit union.  

Michael Edwards, VP and General Counsel of WOCCU states that, "[m]aintaining the availability of cooperative financial services to ordinary physical persons and small and medium enterprises (SMEs) is important for promoting financial inclusion in all types of communities, especially rural districts and poor urban areas that are underserved by commercial banks because of a perceived lack of profitability".

As such, WOCCU urged the following changes to the draft research paper: 

  1. Demutualization should be a last resort for resolving financial cooperatives, i.e. used only when a business combination with another financial coop is not possible;
  2. Mergers or Purchase and Assumption transactions with another financial coop should be the preferred resolution method;
  3. The Association’s paper should be updated to include recent Basel Committee, Canadian OSFI, and EU capital rules for financial coops which have increased financial coops ability to recapitalize; and
  4. Supervisory tools available before the point of non-viability, such as Net Worth Restoration Plans, should be emphasized.
A copy of the letter can be viewed here.
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IADI

Basel Committee Secretary General Indicates Willingness to Fine-Tune Basel Rules to Reduce Reg Burden

Basel Committee Secretary General William Coen indicated in recent public remarks that the Basel Committee is willing to fine-tune its international standards to reduce unintended regulatory burdens. Mr. Coen's remarks were made at the 2017 Institute of International Finance's Annual Membership Meeting in Washington, DC.

Secretary Coen confirmed that “there is likely to be a period during which no further major policy initiatives will be undertaken” by the Basel Committee once the Committee finalizes the rest of their Basel III-related rulemakings: (a) Revisions to the Standardised Approach for credit risk; (b) Standardised Measurement Approach for operational risk; (c) Reducing variation in credit risk-weighted assets – constraints on the use of internal model approaches; and (d) Revisions to the Basel III leverage ratio framework.

Toward the end of the remarks Secretary Coen implies that since the Basel Committee is not certain exactly certain how the new Basel III standards will work in practice (since phase-in is technically in January 2018 for most Basel III rule), the Committee will be open to fin-tuning the standards if they turn out to have unintended consequences.

Also included are comments from Svein Anderson, Secretary General of the Financial Stability Board on a ongoing research project on the effects of reform that, once finalized, "will be an evidence-based starting point for discussing potential deregulatory changes especially with respect to lending to small and medium enterprises (SMEs) and long-term financing." 

The entire update can be viewed here. WOCCU will continue to monitor and engage on these and other issues as they progress.  

Tags
Bank of International Settlements, Basel

Financial Inclusion and Information Sharing among Topics at FATF Meeting

The Financial Action Task Force (FATF) and the Financial Action Task Force of Latin America (GAFILAT) are concluding the first Plenary meeting under the Argentinean FATF Presidency (Nov. 1-3) in Buenos Aires, Argentina. The FATF is the international standard setting body for anti-money laundering/countering the financing of terrorism (AML/CFT) rules.  The purpose of the FATF Plenary meeting is to discuss proposed and final standards for international AML/CFT rules.

Those topics pertinent to credit unions being discussed are as follows:

  • Counter terrorist financing: Discussions on a project that identifies how terrorist organizations fund the recruitment of new members, including reviewing progress in the implementation of the FATF operational plan to tackle all sources, techniques and channels of terrorist financing, including updating the knowledge base on ISIL/Da’ech’ financing strategy;
  • Financial inclusion: Reviewing the results of a project aimed at encouraging countries to implement the FATF Recommendations that will allow financially excluded access to the regulated financial sector, while at the same time maintaining effective safeguards against money laundering and terrorist financing. A proposed supplement to the FATF 2013 guidance on financial inclusion will identify customer due diligence models that are compatible with the goal of making financial services accessible and available to all; and
  • Information sharing: Discussions on the draft guidance for private sector information sharing, which will cover information-sharing at group wide level and between financial institutions not belonging to the same group. Better private sector information sharing will improve transparency and access to beneficial ownership and contribute to detecting financial flows in support of terrorism.
WOCCU engaged the FATF regarding information sharing and financial inclusion AML/CFT issues at a FATF Private Sector Participation Group meeting in March of this year at the UN Office on Drugs and Crime in Vienna, Austria, and also filed written comments with the FATF on these issues in April and July.  We urged the FATF to reduce regulatory burdens on credit unions by clarifying how and when different financial institutions can share information about electronic payments transactions, such as to resolve AML/CFT red flags.  We expect the FATF to issue new guidance on AML/CFT information sharing in the near future.

WOCCU’s recent comments to the FATF include:: 

  • July, 2017, Comments on the FATF Draft Information Sharing Guidance Paper.  View the comment letter here.
  • April, 2017 on Information Sharing, Correspondent Banking and Financial Inclusion-related Customer Due Diligence:  View the comment letter here.
  • March, 2017 at the FATF meeting in Vienna hosted by the UN Office on Drugs and Crime. See the press release here.
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FATF

WOCCU Urges Level Playing Field for Basel Committee FinTech Regs

The World Council of Credit Unions (WOCCU) urged a level playing field where fintech firms are subject to the same regulatory requirements as credit unions in WOCCU's comments to the Basel Committee on Banking Supervision in response to their Consultative Document – Sound Practices: Implications of fintech developments for banks and bank supervisors.  

WOCCU supported the Committee’s proposal that Financial Technology (‘fintech”) companies be subject to comprehensive prudential, consumer protection, data security and anti-money laundering/countering the financing of terrorism (AML/CFT) regulation.  Fintech companies are technology companies that typically do not have a depository institution charter but offer financial services within the “business of banking.”  WOCCU urged 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.

A copy of the letter can be viewed here.

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Basel

ENCU Urges European Commission to Consider the Credit Union Difference in Cross-Border Transactions

The European Network of Credit Unions (ENCU) filed its comment letter on the European Commission's Consultative Document on Transparency and Fees in Cross-Border Transactions in the EU.  In its comments ENCU urged the EC to consider the disproportionate impact that the proposed regulations may have on smaller credit unions, noting that it may result in certain under-served markets being alienated.  Further it noted that credit unions, being member owned, not-for profit organizations will always seek the most efficient pricing for their members.

A copy of the letter can be viewed here.

 

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European Commission

OECD Gives Update on Common Reporting Standard

The Organisation for Economic Co-operation and Development (OECD) provided an update on the implementation of the Common Reporting Standard (CRS) during its recent "Tax Talks" forum.  The forum is designed to provide updates on important recent and upcoming developments in the OECD's international tax work.

The CRS, was developed in response to the G20 request and approved by the OECD Council and calls on jurisdictions to obtain information from their financial institutions, such as the account balances of non-citizens who are not residents of the jurisdiction, and automatically exchange that information with other jurisdictions on an annual basis, mainly for the purpose of limiting the opportunities for taxpayers to circumvent reporting.

During the forum, OECD reported that 49 jurisdictions commenced their reporting on September 30, 2017, and another 53 jurisdictions are slated to commence reporting in September of 2018.  The United Kingdom and the EU states commenced in 2017, with Canada and Australia scheduled for 2018.  The United States has not chosen to participate in the CRS.  A complete list of the signatories, together with their respective implementation date can be found here

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OECD

FSB Issues Report on Financial Sector Cybersecurity Regulations

The Financial Stability Board (FSB) issued its conclusions from a stocktake on cybersecurity regulations, guidance and supervisory practices which was delivered to the October 2017 Finance Minsters and Central Bank Governors in Washington, DC.

Notable findings of the FSB stocktake include the following:

  • All FSB member jurisdictions report drawing upon a small body of previously developed national or international guidance or standards when developing their own regulatory or supervisory schemes for the financial sector;

  • Some elements commonly covered by regulatory schemes targeted to cybersecurity include risk assessment, regulatory reporting, role of the board, third-party interconnections, system access controls, incident recovery, testing and training.

  • Jurisdictions remain active in further developing their regulation and guidance. Seventy-two per cent of jurisdictions report plans to issue new regulations, guidance or supervisory practices that address cybersecurity for the financial sector within the next year.

  • International bodies also have been active in addressing cybersecurity for the financial sector.

Private sector participants in the stocktake expressed support for principles-based, risk-based and proportional regulation, and also stressed the importance of a globally consistent approach that avoids multiple, potentially conflicting regulatory schemes.


The  summary report together with the detailed analysis can be viewed here.

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Financial Stability Board

ENCU Comments on EC Development of Secondary Markets for Non-Performing Loans

The European Network of Credit Unions (ENCU) filed its comments with the European Commission on the Consultation on Development of Secondary Markets for Non-Performing Loans and Distressed Assets and Protection of Secured Creditors from Borrowers' Default.

In its letter ENCU stated that national-level legal frameworks for loan secondary markets strike the appropriate balance for the Member State and opposed EU-level intervention.  Further, that such intervention could unduly disadvantage credit unions who are often second-lien creditors.

Regarding new out-of-court “accelerated loan security” mechanisms, ENCU supported carving out consumer loans from this approach but also urged the Commission not to make loans to small businesses subject to this regime.  ENCU argued that small-business owners are typically physical person consumers who are self-employed and have usually either borrowed as a physical person (such as in the case of a sole trader) or have personally guaranteed loans to their small business if they have incorporated the small business as a legal entity, meaning that social equity grounds militating against applying an accelerated loan security instrument to consumer loans also apply to loans made to small businesses.

A copy of the letter can be viewed here.

Tags
European Commission

WOCCU Urges Changes to Proposed Rules for Simple, Transparent and Comparable Short-term Securitizations

The World Council of Credit Unions filed two comment letters urging changes to benefit credit unions on the Basel Committee on Banking Supervision (Committee) Consultative Documents on the Criteria and Capital treatment for simple, transparent and comparable  short-term securtisations.

WOCCU supports the Committee's efforts to revise the securitization framework to assis the financial industry in the development of simple, transparent and comprable (STC) term securitzation structures for short'term securitization such as asset-backed commercial paper.  The rules could provide a framework fora  more stable funding source for issuers and make it a safer and more attractive investment.

However, WOCCU urged several adjustments to the proposal to make the market friendlier to credit unions as follows:

  • Allow asset-backed commercial paper to be sponsored and backstopped by a consortium of smaller financial institutions;
  • Permit loans made to borrowers with low credit scores or who have a history of bankruptcy to be included in asset backed commercial paper collateral pools;
  • Provide further clarification and guidance on establishing the "homogeneity" requirement for STC asset-backed commercial paper;
  • Provide flexibility in establishing asset performance history by reducing hter minimum track record period for retail and non-retail exposures (no more than two years as opposed to the proposed five years); and
  • Provide flexibility and clarity on meeting experience requirements.
A copy of the letters can be viewed here for the Criteria, and here for the Capital Treatment.
 
Tags
Basel

CPMI Issues Strategy On Security of Wholesale Payments

The Committee on Payments and Market Infrastructures (CPMI), issued its strategy document to improve the security of wholesale payments that involve banks, financial market infrastructures and other financial institutions. There is a sense of urgency by CPMI to move quickly to improve the infrastructure given the rapidly increasing threats of wholesale payments fraud.  

This urgency is clearly evidenced by the recent headlines of a Bangladesh bank official whose computer was hacked to carry out a $81 million heist.

The CPMI is now seeking input from stakeholders. as it plans to develop guidance to help operators and participants of payment systems and messaging networks as well as their respective supervisors, regulators and overseers improve security. The proposed guidance will be developed by early 2018. 

Comments on the proposed strategy should be submitted by November 28, 2017.

 

WOCCU Urges Revisions to Basel Simplified Alternative to Market Risk Capital Proposal

WOCCU urged several revisions to the Basel Committee on Banking Supervision’s consultative document Simplified alternative to the standardised approach to market risk capital requirements.

This the first Basel Committee standard to be proposed as expressly applicable to non-internationally active institutions like credit unions in the United States.   The Committee is proposing a less complex way for depository institutions to reserve for market risks like interest rate risk for available-for-sale bonds and loans.  It is expected that more Basel Committee proposals will focus more on non-internationally institutions like credit unions going forward even though they previously focused on internationally active banks.

The Simplified Alternative to market risk, if structured properly, can reduce regulatory burdens in a proportional manner and facilitate adoption of Basel standards by community-based cooperative financial institutions including credit unions. WOCCU's suggested the following improvements to the proposal as follows: 

  • Allowing non-complex depository institutions up to EUR 10 billion (from a proposed EUR 1 billion) in assets and with trading books up to 10 percent of risk-weighted assets (instead of 5 percent) to utilize the Simplified Alternative;
  • Harmonizing the Simplified Alternative’s risk weights for general interest rate risk, equity risk and commodities risk with those of the standardised approach to market risk;
  • Treating well-capitalized financial institutions without a credit rating as “investment grade” for purpose of counterparty risk;
  • Revising the proposal’s dichotomy between “advanced economies” and “emerging markets” to include the Republic of Korea and the all European Union Member States as “advanced economies;” and
  • Clarifying that the Simplified Alternative market risk standard applies only to the institution’s available-for-sale bonds and loans.
A copy of the comment letter can be viewed here.

Basel Committee Issues FAQs on Basel III definition of Capital

The Basel Committee on Banking Supervision issued Frequently Asked Questions (FAQs) on the Basel III definition of Capital.  Several of the items may be beneficial for credit unions, notably the following:

  • Q. 5 - stating that paid-in capital should preferably be paid-in using cash, which helps support including credit unions and other cooperative shares as regulatory capital;
  • Q. 6 - allowing for dividends to be paid out of reserves (provided all minimum capital ratios are met); 
  • Q. 16 - revising the guidance on the permitted trigger levels and write-down mechanisms for Additional Tier 1 capital instruments accounted for as liabilities through principal loss absorption through a conversion or write-down; and
  • Q. 19 - stating that subordinated debt can qualify as Additional Tier 1 or Tier 2 capital.

The FAQs can be viewed here.

Global Regulatory Update Now Available

The latest edition of WOCCU's Global Regulatory Update is now available containing updates on regulatory developments from across the globe.  This edition contains updates from Australia, Brazil, Canada, Great Britain, Ireland, Macedonia, Netherlands, New Zealand, Poland and the United States. To read the newest edition click on the link here.

Common Reporting Standards Commencing This Month

The Organisation for Economic Co-operation and Development (OECD) recently announced the commencement of bilateral exchange of financial account information under the Common Reporting Standard (CRS) as well as another series of bilateral exchange relationships established under the the CRS. This brings the number of bilateral relationships for the automatic exchange of financial account balances of non-resident, non-citizens held across the globe to over 2000.

At present, 102 jurisdictions have publicly committed to implement the CRS, with 49 being committed to start exchanges this month and a further 53 slated to take up exchanges in September 2018.

With first exchanges for jurisdictions committed to a 2017 timeline now being only weeks away, all 49 have now activated their exchange relationships under the CRS Multilateral Competent Aurhority Agreement (CRS MCAA) and the network of bilateral exchange relationships now covers over 99% of the total number of possible exchange relationships.

The OECD’s Common Reporting Standard is modeled on the United States’ Foreign Account Tax Compliance Act (FATCA) and is intended to help combat tax-evasion by individuals who are using “offshore” financial accounts, i.e. accounts located in jurisdictions where they do not reside, to hide investment income from their home countries’ tax authorities.  Credit unions subject to the Common Reporting Standard will be required to make annual reports to their jurisdiction’s tax authority about accounts held by members who are not local residents, including those accounts’ balances.

A copy of the OECD press release can be viewed here.

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OECD

EU Data Protection Compliance Guide Now Available

World Council is pleased to make available our new Compliance Guide for the EU General Data Protection Regulation/EU-US Privacy Shield to World Council’s member associations and their member institutions.

This recently adopted European Union (EU) data protection legal framework is intended to establish rules for privacy applicable to businesses located anywhere in the world who have customers living in the EU.  This EU regulation claims jurisdiction over non-European companies, including financial cooperatives that have at least one member living in the EU, even though the EU is asserting universal jurisdiction primarily to regulate non-European technology companies like Google.

The EU’s framework requires institutions to appoint a data protection officer, have in place data protection policies that include recordkeeping and data breach notification requirements, obtain consumers’ consent to collect data, and observe other EU consumer data protection rules.  EU authorities can impose fines for non-compliance of EUR 20 million or more per violation.

The United States of America’s Commerce Department and Federal Trade Commission—the latter of which has jurisdiction over US-based privately insured credit unions—have also agreed to help require most US-based businesses to follow this framework, based in part on the Commission’s authority to prohibit unfair and deceptive acts and practices.  The US Consumer Financial Protection Bureau may issue similar guidance in the future that would apply to other US-based credit unions and banks, and EU residents may also have a private right of action to sue non-compliant companies under the US’s Computer Fraud and Abuse Act.

For further information and to review the Compliance Guide, please click here (Login Required).

WOCCU Seeks Input on Basel Market Risk Proposal

The Basel Committee on Banking Supervision has proposed a simplified alternative to the market standardized approach in an effort to facilitate adoption of the Basel Committee’s standard for minimum capital requirements for market risk for banks and credit unions that are not large and internationally active.  

The proposal in short provides for an operationally simpler (and less granular) method of calculating market risk capital in exchange for higher capital requirements and less favorable risk weights. 

Use of the proposed “Simplified Alternative” would be subject to national supervisory approval and oversight, and available only to smaller, less complex banks or credit unions.  The proposal includes a simplified version of the sensitivities-based method (“Standardized Approach”) which is the primary component of the Standardized Approach.  The Basel Committee last updated the standardized approach to market risk in January of 2016

WOCCU's initial summary and analysis of the proposal can be found here.

Please provide comments to Andy Price, Regulatory Counsel at aprice@woccu.org by September 21, 2017.

Tags
Bank of International Settlements, Basel

Basel Committee Seeks Comment on Regulating Fintech

The Basel Committee on Banking Supervision today issued a Consultative Document seeking comment on how regulating the fintech industry, and how fintech rules may affect the banking/credit union industry.  The document makes 10 key observations and related recommendations on supervisory issues for consideration by financial institutions and supervisory authorities.  The document appears to be an attempt to level the playing field between the regulation of traditional financial institutions and the rapidly developing new technologies that appear to lower the barrier to entry into (or in some instances circumvent) the financial services market.

The document is entitled: Sound Practices:  Implications of Fintech Developments for Banks and Bank Supervisors and can be found here.  The deadline for comments is October 31, 2017.

WOCCU looks forward to providing the credit union perspective on this important topic.

 

ENCU Urges Reg Burden Relief on EBA's Deposit Guarantee Schemes Levies

The European Network of Credit Unions (ENCU) filed its comment letter on the European Banking Authority’s (EBA) guidelines on methods for calculating contributions to Deposit Guarantee Schemes (DGS) in the European Union.  Michael Edwards, vice president and general counsel of ENCU made several suggestions on the guidelines as follows:

  • Encouraged the continuation of the ability of national competent authorities to have continued discretion to exclude and adjust the core risk indicators for sectors, such as the credit union sector, based on the legal characteristics and reporting requirements of those sectors, noting that the EBA’s DGS methodology would likely impose excessive reporting requirements on credit unions without continued national discretion in this area
  • Urged the EBA to establish DGS levy guidance that takes into account the value of an institution’s covered deposits relative to the DGS funds’ total CD liabilities or total reserves, and sets higher marginal rates of DGS levies on systemically important institutions such as G-SIBs and O-SIIs;
  • Urged the EBA to recognize all private-sector Institutional Protection Schemes (IPS) in its DGS levy guidelines where the IPS has a history of providing support to its member institutions, whether or not the IPS in question is recognized officially by their national competent authority; and 
  • Opposed the use of Return on Assets (RoA) as a core individual risk indicator because credit unions, as not-for-profit cooperatives, do not seek to maximise RoA. Credit unions generally also have lower RoAs than large banks because of their financial inclusion mission, lower percentage of fee income (as opposed to interest income) as a share of total income in a low interest rate environment, and their smaller economies of scale. 

A copy of the comment letter can be viewed here.

Tags
European Banking Authority

New Guidance Strives to Make Reg Burdens More “Proportional”

Reduced compliance burdens for community-based financial institution are closer to reality with new guidance on “proportional” regulation from the Bank for International Settlements.  The Financial Stability Institute, the arm of Bank for International Settlements that promotes regulatory consistency across jurisdictions, on August 3rd issued new guidance clarifying when supervisors are allowed to deviate from international financial rules in order to reduce burdens on community-based financial institutions.

The guidance shows the range of approaches used to achieve “proportional” regulation in Brazil, the European Union, Hong Kong, Japan, Switzerland and the USA. “National-level supervisors are supposed to apply international financial regulatory standards ‘proportionally’ to smaller, less complex institutions like credit unions, but it was not always clear what ‘proportional’ meant in practice” said Michael Edwards, vice president and general counsel of World Council. “This new guidance provides national-level regulators with examples of compliance burden reduction ‘proportionality’ in six G20 economies that supervisors have discretion to adopt in any jurisdiction.”  Concurrently, the Financial Stability Institute also issued new guidance on cyber-risk.

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Bank of International Settlements

World Council Urges AML/CFT Reg Burden Relief

World Council of Credit Unions on July 31st urged the  Financial Action Task Force to reduce anti-money laundering/countering the financing of terrorism (AML/CFT) compliance burdens in our comment letter on the FATF’s Draft Guidance for Private Sector Information Sharing.  The Task Force, which is based at the headquarters of the Organization for Economic Co-operation and Development in Paris, France, is the international standard setting body for AML/CFT rules.

We argued that the Task Force should focus on reducing paperwork burdens on cooperative financial institutions as well as establish safe harbors, eliminate legal barriers to information sharing between unaffiliated financial institutions, and increase opportunities for compliance efficiencies.  “Information sharing can play a vital role in allowing financial institutions, supervisors and law enforcement to combat money laundering, but regulators need to focus on finding efficiencies and reducing costs on credit unions” said Andrew Price, regulatory counsel for World Council.

Our comments also urged the Task Force to incorporate its “Request for Information” framework established by its recent guidance on Correspondent Banking Services into its information sharing rules.  Referencing the “Request for Information” framework will help credit unions more easily establish and maintain correspondent bank accounts by reducing the perceived compliance, examination and enforcement risks associated with correspondent banking activities.