Share

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.

Tags
Basel

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

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.

Tags
Basel

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

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