Basel Capital Accord

The Basel Committee on Banking Supervision is an international committee established by the Bank for International Settlements to formulate policy on prudential standards and best practices among financial regulators.

The Basel Committee implemented the first Basel Capital Accord in 1988. Originally developed for internationally active banks in G-10 countries, the Accord has now been implemented in over 100 countries for both large and small financial institutions, including credit unions.

In 2000, the Basel Committee began consulting the financial services industry on a revision to the Basel Capital Accord. The purpose of the revision was to provide a more risk sensitive approach to capital adequacy.

On June 26, 2004, the Basel Committee on Banking Supervision issued its revised framework, International Convergence of Capital Measurement and Capital Standards, a Revised Framework. This framework reflects the Committee’s modifications, albeit limited in number, made to the Consultative Paper (CP3) issued in April 2003.

Within this final Basel Accord, the Committee acknowledges that the adoption of the revised framework may not be the first priority in all non-G10 countries to strengthen supervision. Rather, the Basel Committee encourages each national supervisor to consider carefully the benefits of the revised framework with respect to the country’s banking system and then develop a plan to implement the revised framework. Consequently, the Committee realizes implementation will most likely occur beyond the prescribed implementation dates. As a result, the Committee urged supervisors to consider implementing key elements of the supervisory review and market discipline components of the revised framework, even if Basel II minimum capital requirements were not fully established by the implementation date.

In order to assist national supervisors responsible for implementation of the revised framework, the Basel Committee convened a working group in early 2003 to assess the issues involved in implementing Basel II. The working group, comprised of mainly members from non-G10 countries, provides practical suggestions adaptable for use in different jurisdictions to supervisors for the transition to the revised framework.

Basel III

In September 2011, the Basel Committee revised its capital standards in what is referred to as Basel III. Where Basel II was about the risk-weighting of assets, Basel III is about tightening the definition of capital and requiring more of it. Some of the key element of Basel III affecting credit unions include:

• Introduction of a 2.5% capital conservation buffer on top of the 8% risk weighted assets capital requirement. If an institution fails to have this buffer, its ability to pay dividends and discretionary bonuses is proportionally constrained.

• Introduction of a 3% leverage ratio by 2019.

• Introduction of a countercyclical capital requirement. If a country enters a credit bubble, supervisors can require firms to hold an additional countercyclical capital buffer of up to 2.5%. This framework is in the Dodd-Frank Act and applies to all US depository institutions except credit unions because of the recognition that they do not present the same systemic risk concerns.

• Membership shares in credit unions can be counted as Tier I capital if the shares meet covenants regarding permanency and have the ability to absorb losses.

• Basel III calls for legislative changes to be made at national levels between now and 2013 to enable implementation. The implementation will start in 2013 and will not be complete until 2019.