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.