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Basel Seeks to Rein in “Window-Dressing” by Big Banks

The Basel Committee has finalised this disclosure requirement to address the issue of “window dressing” by big banks whereby they reduce their balance sheets for end-quarter reporting and end-year disclousure purposes.  This practice leads to disruptions in the lending market and possible misleading information to investors. 

WOCCU commented on this proposal noting that credit unions are cooperative depository institutions that are not publicly traded, rarely operate on a cross-border basis and do not typically engage in the “window dressing” behavior addressed by the proposal.  In fact, because members of credit unions are physical-person members and legal-person members (which are usually small and medium-enterprises), they often increase their deposits at the end of each quarter, driving their leverage ratios down for end-quarter or end-year reporting.

The final standard will likely not be applicable to most credit unions but apply to internationally-active banks and will require disclosure of quarter-end values and on average of daily values over the quarter as part of their Pillar 3 requirements, in addition to disclosure of the total leverage exposure and the leverage ratio calculated using an averaged value of securities financing transaction assets.

A copy of the standard can be viewed here.

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Basel

WOCCU Recommended Approach Included in Finalized Basel Standard on Client Cleared Derivatives

As urged by WOCCU, the Basel Committee revised the leverage ratio treatment of client cleared derivatives to generally align it with the standardized approach measuring counterparty credit risk exposures (SA-CCR) as used for risk-based capital requirements.

WOCCU encouraged this approach to the leverage ratio in order to help preserve community-based financial institutions’ access to interest-rate derivatives in order to hedge interest rate risk.

Continued access for credit unions and other community based-depository institutions to fair and affordable interest rate swaps and caps promotes safety and soundness by helping community-based institutions hedge interest rate risks related to fixed-rate mortgage loans held in portfolio and similar fixed-rate investments.

WOCCU continues to have concerns that the SA-CCR may itself have capital requirements for banks involved in client clearing of derivatives that are too high for credit unions and other community-based financial institutions to be able to maintain access to interest rate derivatives at fair rates and will continue to monitor this situation.

The revised standard can be viewed here.

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Basel

WOCCU Urges Further Proportionality to FSB in Too Big to Fail Evaluation

WOCCU urged the Financial Stability Board (FSB) to consider issuing clearer guidance on factors that should be considered by national level regulators when developing proportionate approaches to the numerous standards adopted since the financial crisis, many of which are targeted to the "Too-Big-To-Fail" institutions.  

WOCCU noted that the complexity, usefulness, and corresponding regulatory burden and costs for smaller non-systemically important credit unions often becomes questionable, particularly those that are only involved in deposit taking and simple retail consumer lending.  While many of the Too Big to Fail Reforms were necessary, the application to credit unions and other mutuals needs to be appropriately and proportionately tailored.

The comments came as part of the FSB's Evaluation of the Too-Big-To-Fail Reforms.

A copy of the letter can be viewed here.
 

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Financial Stability Board

FSB Issues Reports on Correspondent Banking

The Financial Stability Board (FSB), published two reports outlining its progress on its plan to assess and address the decline in correspondent banking relationships and or remittances service providers' access to banking service.  Notably the report notes that the decline in the number of correspondent banking relationships remains a source of concern for the international community, as the number of active correspondent banks declined by 3.4% in 2018, bringing the cumulative decline since 2011 to 19.3%. Concentration increased, as fewer correspondent banks are handling payments.

Access to correspondent banking relationships remains a critical issue in some regions and jurisdictions. WOCCU has consistently urged the continuation of efforts to reduce "de-risking" in the financial system which often creates obstacles for low risk credit unions trying to establish correspondent bank accounts or clear checks.

The FSB reports can be viewed here.

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Financial Stability Board

FSB Launces Evaluation of Too-Big-To-Fail Reforms

The Financial Stability Board (FSB) announced it is seeking feedback from as part of its evaluation of the effects of the "Too-Big-To-Fail" reforms for banks that were agreed by the G20 in the aftermath of the global financial crisis. The evaluation will assess whether the implemented reforms are reducing the systemic and moral hazard risks associated with systemically important banks and the broader effects of the reforms on the overall functioning of the financial system.  

Further information on the evaluation can be viewed here.

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Financial Stability Board

WOCCU Calls for Further Proportionality Guidance for Credit Unions

Following a meeting by representatives of the credit union industry, the World Council of Credit Unions wrote to the Basel Committee on Banking Supervision (Basel Committee) to ask for further guidance to achieve the goal of better proportionality in regulation for credit unions.

In its letter, WOCCU urged additional guidance in the form of a set of high-level principles or weighing-factors on when less complex regulatory approaches can be warranted.  WOCCU noted that without additional guidance, many national-level policymakers continue to feel obligated to apply Basel III and other Basel Committee standards to non-complex, purely domestic deposit-taking institutions such as credit unions.  This notwithstanding that the Basel framework is intended only for internationally active banks and the expensive compliance standards are not warranted for credit unions. 

This letter followed an effort led by WOCCU making the case for proportionality to the Basel Committee last week with several representatives of the credit union industry including Canadian Credit Union Association (CCUA) President & CEO Martha Durdin, Customer Owned Banking Association (COBA) President & CEO Mike Lawrence and Credit Union National Association (CUNA) Chief Advocacy Officer Ryan Donovan.

A copy of the letter can be viewed here.

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Basel

WOCCU Urges Further Proportionality to FSB to Increase SME Lending

WOCCU urged the Financial Stability Board (FSB) to continue with proportionality efforts in light of the voluminous regulatory reforms adopted since the financial crisis.  WOCCU noted that the additional complexity often filters down disproportionately to smaller, less complex institutions such as credit unions and other community based cooperative institutions.  WOCCU commented that these regulations need to be proportionately tailored and noted that the effects can have significant impact in their ability to lend to SMEs. 

These comments came as part of the FSB’s request for Feedback on the Effects of Financial Regulatory Reforms on SME Financing where they are evaluating how the regulatory reforms have affected SME lending.

A copy of the letter can be viewed here.

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Financial Stability Board

WOCCU Urges Basel Committee to Provide Flexibility with Leverage Ratio Disclosures

World Council urged the Basel Committee on Banking Supervision (Committee) to make the use of daily averages in disclosures optional for non-complex depository institutions such as credit unions and other community-based mutual depository institutions that follow standardized risk-based capital rules. 

The Committee is seeking input in its consultative document Revisions to Leverage Ratio Disclosure Requirements and is seeking to address the issue of “window dressing” that occurs with internationally active, publicly traded banks reduce their balance sheets for end-quarter and end-year disclosure purposes that have macroeconimic effects and can provide misleading information to investors. 

WOCCU notes that credit union do not typically engage in this “window dressing” behavior and thus the disclosures may result in disproportionate reporting burdens on credit unions.  WOCCU did urge the ability to have the option of using daily averages for reporting purposes.

A copy of the comment letter can be viewed here.

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Basel

WOCCU/CUNA Urge IRS to Reduce FATCA Regulatory Burden

WOCCU and the Credit Union National Association (CUNA) jointly urged the Internal Revenue Service (IRS) to reduce regulatory burden for Credit Unions in connection with the Foreign Account Tax Compliance Act (FATCA).  These comments came as part of the IRS’ FATCA rulemaking efforts looking for regulations that should be modified or eliminated in order to reduce unnecessary burdens. 

WOCCU and CUNA strongly supported many aspects of the rule that will reduce unnecessary regulatory burden for credit unions including the elimination of withholding on payments of gross proceeds from the sale or other disposition of any property of a type which can produce interest or dividends from sources within the United States.

FATCA places significant compliance costs on U.S. credit unions, especially those that engage in remittances and/or have members who are not U.S. citizens. As a result, Americans living and working abroad have had their bank accounts closed, as well as loans and mortgages recalled and denied. This is in large part because many financial institutions simply cannot justify serving these members and customers due to the high costs associated with FATCA compliance. 

A copy of the comments can be viewed here.

ENCU Urges ESA to Minimize AML/CFT Regulatory Burdens

The European Network of Credit Unions urged the European Supervisory Authorities to use the increased communication and collaboration that will be gained as a result of the revised guidelines for the “AML Colleges” to reduce regulatory burden for credit unions. 

These comments came as part of the consultation process on the Draft joint guidelines on the cooperation and information exchange for the purposes of Directive (EU) 2015/849 between competent authorities supervising credit and financial institutions. The AML Colleges will be used to establish supervisory protocols when an institution crosses over multiple countries or jurisdictions for supervision regarding Anti-Money Laundering and Countering Financing of Terrorism.

ENCU noted that AML/CFT burdens are often disproportionately borne by credit unions as they do not have the economies of scale as larger institutions and are not-for-profit, member-owned cooperatives governed by a board of members who usually serve on a voluntary basis without receiving any remuneration for time and resources dedicated to the credit unions.

A copy of the comment letter can be viewed here.

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European Banking Authority

Basel Committee Completes Review of Principles for Sound Liquidity Risk Management and Supervision.

The Basel Committee on Banking Supervision (Committee) completed its review of the 2008 Principles for sound liquidity risk management and supervision without making any changes and confirming that  the principles remain fit for their purpose.  This means that there are no new regulatory burdens for credit unions related to liquidity standards under Basel standards.  This is consistent with WOCCU's advocacy urging the Committee to limit compliance burdens for community-based depository institutions.

The Committee advised continued vigilance of liquidity risks in financial markets noting that significant developments in financial markets since the publication of the Principles that can cave bearing on liquidity.  These include the following:

  1. Digitisation of finance and payment systems and the broader growth of financial technology;
  2. A greater use of central clearing of derivatives and margining; and
  3. The increasing risk and magnitude of cyber-attacks.

The Committee noted the importance of financial institutions establishing a robust liquidity risk management framework and urged continued adherence to the broader liquidity risk management considerations set out in the Principles.

The press release can be viewed here.

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Basel

WOCCU Urges Basel Committee to Preserve Access for Credit Unions to Interest-Rate Derivatives

WOCCU urged the Basel Committee on Banking Supervision (Basel Committee) to preserve community-based financial institutions’ access to interest-rate derivatives in order to hedge interest rate by adopting revisions to the leverage ratio that utilizes the standardized approach to counterparty credit risk (SA-CCR) for a banks’ leverage ratio capital requirements with respect to client cleared derivatives. 

WOCCU notes that unless such revisions are made, smaller users of interest rate swaps and caps may no longer be able to access interest rate derivatives at fair rates, or at all.  This access is important as it helps promote safety and soundness by helping credit unions hedge interest rate risks related various items that may be in their portfolios or similar fixed-rate investments.

These comments were filed as part of the Basel Committee’s Consultative Document:  Leverage Ratio Treatment of Client Cleared Derivatives and a copy of WOCCU’s letter can be viewed here.

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Basel

WOCCU Urges Clarification by IASB on Treatment of Financial Instruments with Characteristics of Equity

In a recently filed comment letter with the International Accounting Standards Board (IASB) on their Discussion Paper:  Financial Instruments with Characteristics of Equity, WOCCU strongly supported continuing the IASB existing approach to classifying cooperative shares as equity when the cooperative has an unconditional right to refuse redemption of the shares,  yet urged clarification on the IASB’s approach to the treatment of accounting for convertible bonds and similar instruments particularly as they relate to contractual and non-contractual rights of the instrument.

A copy of the comment letter can be viewed here.

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International Accounting Standards Board

Basel Committee Reduces Disclosure Burdens as Urged by World Council

The Basel Committee on Banking Supervision (Basel Committee) has exempted credit unions and other community-based depository institutions from many aspects of its disclosure rules and has made other disclosure requirements optional at the national-level, as World Council of Credit Unions (World Council) urged in comments filed earlier this year. The Committee issued the new disclosure rules, which are part of the Basel III international risk-based capital and liquidity standard, on December 12th.

Under the new rules virtually all community-based depository institutions will be exempt from the disclosure standard’s requirement to report historical operational losses. Many other disclosure requirements will be limited to institutions that use internal models to calculate capital levels or are parties to derivatives transactions, which de facto exempts most community-based depository institutions from these paperwork burdens.

In addition, it will be up to national-level regulators to decide whether to require depository institutions to issue disclosures on capital distribution constraints and on exposures to problem assets under expected credit loss accounting standards like International Financial Reporting Standard 9 (IFRS 9) and United States generally accepted accounting principles’ Current Expected Credit Losses (CECL).  

“We commend the Basel Committee for establishing proportional reporting thresholds and increasing national discretion over disclosures requirements, which should help reduce the regulatory burden spillover that rules for internationally active banks often have on community-based institutions like credit unions and other mutual deposit-taking institutions,” said Michael Edwards, World Council’s senior vice president and general counsel. 

The new disclosure framework, which is formally named Pillar 3 disclosure requirements - updated framework, is scheduled to take effect in 2020 for disclosures on asset encumbrance, capital distribution constraints and exposures to problem assets, with the rest of the framework taking effect when the Basel III standard is fully phased-in in 2022.

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Basel

Report on Incentives to Centrally Clear OTC Derivatives Reflects WOCCU Concerns

The Financial Stability Board (FSB), the Basel Committee on Banking Supervision (BCBS), the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) published their final report on Incentives to centrally clear over-the-counter (OTC) derivatives which includes provisions addressing issues raised by WOCCU in its comment letter

The report issued today notes that incentives available for larger firms were not always in place for other types of firms including credit unions and that this report c ould be used as a basis for possible fine-tuning some of the post-crisis regulatory reforms. 

The central clearing of standardised OTC derivatives is a pillar of the G20 Leaders' commitment to reform OTC derivatives markets in response to the global financial crisis and this report evaluates how these reforms interact and how they could affect incentives.

WOCCU will continue to monitor this report to ensure that access for credit unions and other community based-financial institutions are treated fairly and proportional.

A copy of the final report can be viewed here.

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Financial Stability Board

Cyber Lexicon Includes WOCCU Recommended Changes

The Financial Stability Board (FSB) published a Cyber Lexicon intended to support the work of the FSB, standard-setting bodies, authorities and private sector participants to address financial sector cyber resilience. 

WOCCU recently supported the initiative to develop a Cyber Lexicon to address cyber security and cyber resilience in the financial sector, but made numerous suggestions, many of which were included in today’s issuance.  Of note was the WOCCU recommended approach taken by the FSB to focus the scope of the lexicon on core terms and exclude overly technical terms as well as general business and regulatory terms to avoid confusion among industries.

The lexicon as adopted can prove to be useful to support work in the following areas:

  • Cross-sector common understanding of relevant cyber security and cyber resilience terminology;
  • Work to assess and monitor financial stability risks of cyber risk scenarios;
  • Information sharing as appropriate; and
  • Work by the FSB and/or standard-setting bodies to provide guidance related to cyber security and cyber resilience, including identifying effective practices.

The lexicon will be delivered to the G20 Leaders’ Summit in Buenos Aires later this month and can be viewed here.

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Financial Stability Board

WOCCU Urges Increased Proportionality in Inter-US/Canada Regulations

World Council urged both the United States and Canada to adopt proportional approaches to regulations and not adopt a “one-size-fits-all” approach that increases burdens for smaller financial institutions such as credit unions that often lead to higher costs, reduced services and reduced growth as part of the strategy to improve trade relationships that will benefit both Canada and the United States.

These comments came were made on a Request for Information from the Office of Information and Regulatory Affairs (OIRA) of the Office of Management and Budget’s (OMB) for the United States-Canada Regulatory Cooperation Council (RCC) on the respective country’s efforts to reduce unnecessary regulatory differences between the United States and Canada.

WOCCU noted that the member-owned not-for-profit structure of credit unions that returns their earnings directly to their members warranted sucha a proportional approach and would lead to better aligned regulatory systems, greater integrated economies, and improved trade relationships.

A copy of the letter can be viewed here.

FATF Issues Business Bulletin Noting Several AML/CFT Developments

The November edition of the FATF Business Bulletin provides a brief update on outcomes from the October 2018 FATF plenary meeting.

Of note are the following:

  • Amendments to the FATF Recommendations and Glossary to respond to the increasing use of virtual assets for Money Laundering and Terrorist Financing;
  • The start of a project that will consider the feasibility of expanding the FATF Recommendations applicable to proliferation financing;
  • Future work on Digital Identity to develop guidance for acceptability of digital ID focusing on the reliability and independence features of digital IDs;
  • Developing reports addressing how large internanational financial institutions identify suspicious activity and the other describing the practical considerations in setting up public-private partnerships.

The complete summary of outcomes from the Plenary is available here and the November Business Bulletin can be viewed here.

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FATF

World Bank Issues Paper on Regulation of Financial Cooperatives including Credit Unions and Their Role in Financial Inclusion

The World Bank issued its paper “Financial Cooperatives Issues in Regulation, Supervision, and Institutional Strengthening”, highlighting the role if financial cooperatives, including credit unions, as significant drivers of financial inclusion.  The paper notes that the significance of financial cooperatives in terms of financial inclusion in the developing world cannot be underestimated.

Included in the paper is a focus on the main issues surrounding the regulation, supervision and strengthening of financial cooperatives building on examples from different countries as well as on the inputs received from the public.  

A copy of the paper can be downloaded here.

Regulatory and Supervisory Challenges with Financial Inclusion Discussed at FSI-GPFI Conference

The BIS’s Financial Stability Institute (FSI) and the G20s Global Partnership for Financial Inclusion (GPFI) convened a conference to discuss the implications of fintech for financial regulation and supervision and the work of the various standard setting bodies.

Participants explored specific examples of adapting regulatory, supervisory and safety net practices to take into account fintech developments; ways for financial sector authorities to leverage the same technologies driving fintech to support their own work; and the application of the concept of proportionality in the implementation and assessment of international standards.

The conference took place in the context of accelerating change in the financial services landscape in countries across the income spectrum, including expanding opportunities for financial inclusion, but also new challenges for country-level authorities and for standard setting bodies.  Further coverage of this event can be found here.

WOCCU has been active surrounding developments in regulation concerning fintech most recently urging the Global Financial Innovation Network (GFIN) to ensure a level regulatory playing field for credit unions as well as including the principles of proportionality in connection with GFIN’s proposal to create a regulatory “global sandbox” for fintechs.  A copy of this letter can be viewed here

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Bank of International Settlements

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.

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Basel

WOCCU Urges Level Playing Field for Regulatory "Global Sandbox" for Fintechs

WOCCU urged the Global Financial Innovation Network (GFIN) to ensure a level regulatory playing field for credit unions as well as including the principles of proportionality in connection with GFIN’s proposal on creating a regulatory “global sandbox” for fintechs.    

GFIN is collaboration between 12 regulators and other related parties who are seeking to provide a more efficient way for innovative firms to interact with regulators, helping them navigate between countries as they look to scale new ideas.   Their proposal will also create a new framework for cooperation between financial services regulators on innovation-related topics.

World Council supports many aspects of the GFIN’s proposed mission statement but urges the Member Agencies of the GFIN also to include the principles of a level regulatory playing field and the principle of proportionality.  

World Council also recommended:

  • All participants in the financial sector, including fintechs and other non-traditional firms accepting deposits or similar repayable funds, should be subject to the same comprehensive and effective anti-money laundering/combating the financing of terrorism
  • Pilot programs to promote regulatory innovation should be conducted at the national or provincial level. The World Council does not support conducting cross-border trials;
  • GFIN make the protection of depositors from risk of loss a fundamental aim of the network, especially in jurisdictions where fintechs and other non-traditional firms accept deposits;
  • GFIN exercise caution in granting exemptions from existing regulations for so-called “new” activities that are really traditional banking activities delivered from a new channel;
  • GFIN member agencies should achieve a high level of coordination and cooperation with other global standard-setting bodies.

 A copy of the letter can be viewed here.

 

WOCCU Urges Flexibility by FSB for Legal Entity Identifier

WOCCU urged the Financial Stability Board to incentivize increased uptake of the Legal Entity Identifier rather than to mandate its usage.  This approach will limit unreasonable regulatory burdens on credit unions and other community-based financial institutions as the expense of such adoption outweighs the benefit of mandatory adoption.  WOCCU acknowledged the benefits of optional adoption that can result from the use of LEI in areas such as AML/CFT and other areas,but did not support mandatory adoption for smaller institutions.

These comments came as part of the FSB's Thematic peer review on implementation of the Leal Entity Identifier:  summary Terms of Reference.


A copy of WOCCU's letter can be viewed here.

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Financial Stability Board

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.

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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.

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Basel