Global Regulatory Update

World Council's twice yearly electronic newsletter of regulatory issues throughout the world

March 2010 / Issue 8

Australia: Large Deposit and Wholesale Funding Guarantees Will End

On March 31, the Australian government will end its deposit guarantee plan for amounts on deposit of more than AU$1 million (US$0.9 million) and for wholesale funding raised by Australian financial institutions. The government will continue to guarantee deposits of less than AU$1 million in credit unions, banks and building societies.

The credit union and mutual building society body, Abacus - Australian Mutuals, was highly critical of the fee structure, which charged Australia's dominant big-four banks only 70 basis points for the guarantee, while credit unions and other smaller banking institutions that rated BBB or were unrated were charged 150 basis points. Only one Abacus member, a large building society, raised guaranteed wholesale funding under the government plan. Australian banks and other lenders have so far paid approximately AU$1.1 billion for the use of the guarantee and will pay about AU$5.5 billion over its full life.

The government will continue to guarantee deposits of up to AU$1 million in Australian banks, credit unions and building societies for no fee. This guarantee is provided under the Financial Claims Scheme, and the AU$1 million cap will be reviewed in October 2011.

Abacus believes the AU$1 million threshold should be maintained indefinitely, while Australia's banking market remains in its current highly concentrated state. An Australian Parliamentary Committee report on bank mergers reported in September 2009 that the Australian banking market is, by some criteria, the most concentrated it has been for a century.

Source: Abacus - Australian Mutuals,


Canada: Federal CU Legislation Will Proceed

On March 10, Canadian Finance Minister Jim Flaherty announced his government's intention to proceed with federal credit union legislation — a historic step for the Canadian credit union system. The main purpose of a federal credit union charter is to accommodate the growth and expansion of the Canadian credit union system beyond provincial borders. Credit unions that so choose can pursue business strategies that are not constrained by provincial incorporation under the new regulation.

Credit Union Central of Canada (CUCC) supports the availability of a federal option and welcomed the announcement as a step toward enabling credit unions to choose a new method to address growth opportunities and enhance member service.

Further information can be found in CUCC's Policy and Advocacy Report

Source: Credit Union Central,


European Union: Commission Seeks a Pan-European Solution for Deposit Insurance

In autumn 2008, the European Union's (EU) financial crisis was considerably aggravated when it became clear that customer deposits in banks in other countries were insufficiently covered by deposit insurance. The consequence was a loss of confidence and a run on deposits that caused many banks further stress, pushing some toward the brink of insolvency.

In order to avoid similar future situations, the European Union is looking to modify its approach to deposit insurance. The new European Commissioner for Internal Market, Michel Barnier, has already assured the European Parliament that he will draft a legislative proposal aimed at raising deposit insurance standards in the direction of a pan-European system. Two options are being considered: 1) connecting existing national systems in a European network of deposit insurance providers; and 2) establishing a single pan-European deposit guarantee model that will apply to all EU countries.

The second option in particular has caused controversy. While proposal details are not yet clear, some stakeholders, including credit unions, fear negative consequences for national deposit guarantee systems if a pan-European model is established. Under such a system, it's likely cross-border systemic banking organizations would be required to pay into a European arrangement and would consequently withdraw from national-level systems. Consequently, national-level participation fees for purely local institutions, such as credit unions, would considerably increase. The European Network of Credit Unions is now raising awareness among Commission members and the European Parliament on the potential negative financial impact a pan-European model would have on credit unions.

Source: European Network of Credit Unions,


Great Britain: CUs Hopeful Despite Delays

On March 8, Parliament introduced a legislative reform order to the Credit Union Act in Great Britain that will amend outdated legislation to allow credit unions significant growth opportunities. However, the reform order must be considered by the Parliamentary committee within 60 days of its introduction. Due to an imminent dissolution of the Parliament before the spring general election, approval of legislative reforms will have to be taken up after Parliament resumes.

The legislative reforms will allow credit unions to serve more people, pay interest as opposed to only dividends, and offer expanded services. It will also help strengthen credit unions through improved liquidity, capital and reporting requirements.

Source: ABCUL,


Ireland: Regulatory Structure Reform Raises Concerns

The Irish government has announced its intention to establish a single, fully integrated regulatory body called the Central Bank of Ireland Commission. However, the country's credit unions are concerned that the redesign of regulations could have an adverse effect on credit unions and are advocating for an independent credit union regulator.

The Irish League of Credit Unions (ILCU) has opposed the planned reforms before the Minister for Finance and key government figures. Credit unions are concerned that during the regulatory redesign new structures put in place to address the banks' excesses could have an adverse effect on credit unions.

In addition, the Minister for Finance recently announced plans for a strategic review of credit unions to be conducted by the Registrar for Credit Unions. On February 2, ILCU representatives appeared before the Joint Oireachtas (National Parliament) Committee on Economic Regulatory Affairs (the ERA Committee) to state the position that credit unions should be regulated in a structure outside the Central Bank Commission and through the establishment of an independent credit union regulator.

An Oireachtas press release confirmed that the impact on credit unions of the proposed overhaul of the Irish financial services sector's regulatory regime will form a key part of the ERA Committee work program over the next six months.

On another topic, the 2009 Criminal Justice (Money Laundering and Terrorist Financing) Bill, through which the Third EU Anti-Money Laundering Directive is being transposed into Irish law, is currently passing through the Houses of the Oireachtas. Guidance has been developed for the financial services sector by a working group comprised of members of the financially regulated representative bodies, including an ILCU representative. A sector guidance note for credit unions is being developed.

Northern Ireland: Regulatory Reform

The Northern Ireland (NI) Assembly and Her Majesty's (HM) Treasury in the U.K. have issued two reports regarding regulation of credit unions in Northern Ireland. Both of these reports recommend that NI credit unions should be brought within the scope of the 2000 Financial Services and Markets Act, while leaving the legislative and registration functions within the NI Assembly and Department of Enterprise, Trade and Investment (DETI).

An ILCU delegation met with representatives of the U.K.'s Financial Services Authority on January 6, 2010 to discuss its position on the recommendations made by DETI and HM Treasury regarding Northern Ireland credit unions.

Source: ILCU,


Kenya: Stakeholders Discuss New Regulation

In the wake of the Savings and Credit Cooperatives (SACCO) Societies Act passed in December 2008, Kenya's government has finalized and published draft regulations for its SACCOs, or credit unions, for discussion by a technical committee appointed by the Minister of Co-operative Development.

The SACCOs were able to submit written comments on the new regulations by March 1. SACCO leaders have also been invited to a stakeholders' meeting on March 15 to discuss the draft regulation before it is submitted to the attorney general. The new SACCO regulations are expected to be implemented during the next three months.

The newly formed SACCO Societies Regulatory Authority (SASRA) is in the process of hiring staff.

Source: KUSCCO,


New Zealand: CUs Face New Credit Rating Requirements

Beginning March 1, the Reserve Bank of New Zealand is requiring all non-bank deposit taking institutions (NBDT) -- including credit unions -- with liabilities of more than NZ$20 million (US$14 mil) to obtain a credit rating. Small credit unions with total liabilities of less than NZ$20 million will be exempt from this requirement. Under this requirement, seven of New Zealand's 31 credit unions are required to have a credit rating. Advertising requirements have also been put in place for both rated and non-rated entities.

Some NBDTs had already reviewed their offer documents and amended their registered prospectus, investment statement and advertising in anticipation of the new requirements. All registered prospectus and investment statements must contain the NBDT's credit rating as well as information that enables investors to understand the meaning and context of the credit rating. (Click here for more information.) The new requirements are aimed at helping depositors understand the risks associated with where they deposit and/or invest their money.

New Zealand's credit unions expect additional legislative reforms in 2010, which started with four documents released by regulatory bodies. Two documents that specifically address the NBDT sector include draft regulations for new capital requirements and a consultation paper on proposed liquidity regulations. There continues to be industry consultation on anti-money laundering reforms ahead of last year's passage of regulations under the Anti-Money Laundering Act. Unfortunately, legislative reforms that would enable credit unions to raise permanent capital from its membership and external sources have been delayed on the parliamentary timetable together with other reforms for mutual institutions.

Source: NZACU,

United States: CUs Request Increased Business Lending Cap

Regulatory restructuring in the United States, as well as regulatory relief for U.S. credit unions with respect to business lending and capital requirements, appear to be inching closer to the finish line.

The Credit Union National Association (CUNA) and other credit union stakeholders are asking the U.S. Congress to pass legislation which would increase federally-insured credit unions' member-business lending cap from 12.25% to 25% of assets. This change could lead to at least $10 billion in new credit union lending to small businesses without using any taxpayer money, and could potentially create as many as 100,000 new jobs.

In addition, credit unions are seeking authority for all federally-insured credit unions to count subordinated debt as regulatory capital, as allowed under the Basel II protocol. Currently, only corporate credit unions and low-income credit unions may count subordinated debt as regulatory capital in the U.S. These measures appear to be gaining support in Congress, but it is unclear when, or if, these initiatives will be adopted into law.

In December 2009, the U.S. House of Representatives passed an omnibus financial regulatory overhaul bill called The Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173). The U.S. Senate, however, is expected to release its own omnibus financial regulatory overhaul bill in early March, which brings the future of H.R. 4173 into doubt. Based on a similar draft bill released by the Senate last year, it is likely that the Senate omnibus bill will propose fewer changes to the financial regulatory system than H.R. 4173 does.

The National Credit Union Administration (NCUA) is continuing to receive comment letters from the public regarding the agency's Notice of Proposed Rulemaking to restructure the U.S. corporate credit union system (corporate credit unions are institutions which serve the investment and liquidity needs of so-called natural person credit unions; NCUA placed the two largest U.S. corporate credit unions, U.S. Central and WesCorp, under government conservatorship in March 2009). The proposed regulation would require corporate credit unions to become Basel I compliant, restrict their investment powers, and require stringent asset and liability duration matches. CUNA is generally supportive of the proposed rule but plans to submit a comment letter suggesting modifications that would enhance corporate credit unions' ability to provide services to the natural person credit unions which are their members.

Source: CUNA,


World News: Basel Committee Proposes Measures to Strengthen Global Capital

A consultative document titled Strengthening the Resilience of the Banking Sector issued by the Basel Committee on Banking Supervision proposes to improve the quality of capital by redefining tier 1 and tier 2 capital and eliminating tier 3 capital. The Basel II framework for the first time specifically mentions the unique capital structure of financial cooperatives. WOCCU is currently preparing a comment letter asking for a proportionate regime for credit unions. Comments are due April 16.

The reform package covers the following key areas:

Raising the quality, consistency and transparency of the capital base
The committee's goal is to ensure that banks move to a higher capital standard that promotes long- term stability and sustainable growth, creating a banking system that will be in better position to absorb losses. In terms of the quality of capital, the Basel Committee proposes that tier 1 capital be defined as common shares and retained earnings. Innovative hybrid capital instruments will be phased out and tier 3 capital instruments eliminated. The committee further proposes to enhance capital base transparency by requiring institutions to disclose the capital elements in specific reported accounts. The committee proposes strengthening the capital requirements for counterparty credit-risk exposures arising from derivatives, repurchase agreements and securities financing activities.

Reducing procyclicality and promoting countercyclical buffers
The committee has proposed capital buffers resulting in a countercyclical capital framework that will help stabilize the banking system and dampen rather than amplify economic and financial shocks. The committee is also promoting more forward-looking provisioning based on expected losses, which captures actual losses more transparently and is less procyclical than the current "incurred loss" provisioning model.

Supplementing the risk-based capital requirement with a leverage ratio
This will help contain the build-up of excessive leverage in the banking system and introduce additional safeguards against model risk and measurement error.

Next steps
The Basel Committee will be conducting impact assessments of these proposed rules throughout 2010, with a goal finalizing them by year end and phasing in implementation by the end of 2012.


World News: Basel Committee Consults On Strengthened Liquidity Framework

The Basel Committee has developed a proposal on international framework for liquidity risk measurement, standards and monitoring by supervisory authorities. Although the framework's scope is intended for internationally active banks, it could be applied more broadly to a variety of institutions, including financial cooperatives. WOCCU is working with its members to respond to this proposal by April 16.

The proposed framework is a follow-up to the Principles for Sound Liquidity Risk Management and Supervision, published by the committee in September, and seeks to further strengthen financial institutions' liquidity cushion.


World News: Basel Committee Consults on Microfinance and Core Principles for Supervision

In February, the Basel Committee on Banking Supervision along with the Consultative Group to Assist the Poor issued a consultative document titled Microfinance Activities and the Core Principles for Effective Banking Supervision. The paper includes outcomes of a Basel Committee survey which assessed whether and to what extent the Core Principles for Effective Banking Supervision should be adjusted for institutions involved in microfinance activities. Financial cooperatives are referenced throughout the document. It represents the Basel Committee's first formal recognition of microfinance and its thinking on how the Core Principles of Effective Banking Supervision need to be scaled, adopted or enhanced to deal with financial cooperatives and microfinance activities.

WOCCU is meeting with the Basel Committee staff on this proposal and will provide formal comments by the May 7 deadline.


World News: New Basel Committee Capital and Liquidity Proposal Webinar Scheduled

Don't miss this chance to learn about the latest Basel Committee capital and liquidity proposals and what they mean for credit unions. On Wednesday, April 7, 2010, WOCCU will host a free webinar for members and regulators. Karl Cordewener, the Basel Committee for Banking Supervision's deputy secretary general, will discuss the proposal and where international standards are heading. For more details and to sign up, visit: