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.