Basel Committee Finalization of Stress Testing Principles Includes WOCCU Recommended Proportional Approach

The Basel Committee on Banking Supervision (Committee) issued its Stress Testing Principles including WOCCU recommended approach of implementation on a proportionate basis, depending on the size, complexity and risk profile of the institution for which the authority is responsible.  WOCCU members have often reported “gold-plating” and excess supervision involving stress testing.  The inclusion of the proportionality language, together with the WOCCU recommended direction to consider that the resources of the organizational structure are adequate given complexity of the exercises, should provide regulatory relief for credit unions from excessive supervisory requirements.

A copy of the Committee’s Stress Testing Principles can be viewed here.


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 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.


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.


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.


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 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.


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.


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.  

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.


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.

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 by September 21, 2017.

Bank of International Settlements, Basel