Promote Financial Community Diversity, WOCCU Urges Basel Committee

April 16, 2010

MADISON, Wis. — The stability provided by smaller, community-based financial institutions is critical in keeping the overall economies of communities and countries upright when the growth schemes of large, complex banks go awry. That key lesson was learned by many during the 2009 global economic crisis. World Council of Credit Unions (WOCCU) would like to make sure new recommendations put forth by the Basel Committee on Banking Supervision not only recognize this fact, but offer provisions that don't penalize smaller institutions, especially credit unions.

The new guidelines, released for public comment in December and adapted with guidance from the Group of 20 (G-20) nations in response to last year's global economic meltdown, recognize for the first time differences between large for-profit financial corporations and non-joint stock companies, which include mutuals, cooperatives and credit unions. WOCCU sought input from its member organizations worldwide in order to craft two April 16 response letters that assure these differences and other factors that favorably affect financial cooperatives appear in the final guidelines.

"The presence of community-based, not-for-profit financial institutions has been a redeeming aspect of financial sectors during the great recession, and they have aided many economies in finding solutions to harsh economic problems," wrote Dave Grace, WOCCU vice president of association services and the letters' author. "It is imperative that the Basel Committee's work not only do no harm to financial cooperatives, but actively promote diversity of the financial sector."

WOCCU in the past has submitted its ideas and suggestions for consideration by the Basel Committee, and had met with committee Chairman Nout Wellink in 2009 to make the case for credit unions. In response, current amendments to the Basel II Accord reflect a greater understanding of the different structure and nature of financial cooperatives. The reform package covers the following key areas of interest to credit unions:

  1. Raising the quality, consistency and transparency of the capital base. The new guidelines seek to ensure that financial institutions move to a higher capital standard that promotes long-term stability and sustainable growth, enabling the banking system to better absorb losses on existing banks and banks that have gone out of business. The committee proposes that Tier 1 capital be defined as common shares and retained earnings and tailored accordingly for credit unions' structure. Tier 2 capital instruments must be better aligned and Tier 3 capital instruments should be eliminated. 
  2. Reducing procyclicality and promoting countercyclical buffers. A countercyclical capital framework will help better stabilize the banking system than a procyclical one, dampening rather than amplifying economic and financial shocks. To this end, adequate capital buffers at individual institutions should be established. The committee also is promoting more forward-looking provisioning based on expected losses that captures actual losses more transparently and is less procyclical than the current model.

On April 7, WOCCU held a 90-minute international webinar for its members, global financial regulators and Basel Committee staff to discuss the impact of proposed changes to the Basel II Accord. Input from the webinar and from member groups served as the basis for WOCCU's response letters, according to Grace.

"With the exception of recognizing that a cooperative's ownership shares qualify as Tier 1 capital, the committee's proposals do little to aid credit union development," Grace said. "We strongly urge the Basel Committee to more actively enable the development of such institutions and serve as a counter-weight to the too-big-to-fail entities by ensuring credit unions access to deposit insurance systems, central bank liquidity windows, payment/settlement systems and card networks.

"We also encourage prudential, but proportional supervision of the sector to help ensure that local community-based financial institutions can support the industry's financial stability," Grace added.

Both response letters are available for download. View the consultative document on Strengthening the Resilience of the Banking Sector or International Framework for Liquidity Risk Measurement,
Standards and Monitoring

World Council of Credit Unions is the global trade association and development agency for credit unions. World Council promotes the sustainable development of credit unions and other financial cooperatives around the world to empower people through access to high quality and affordable financial services. World Council advocates on behalf of the global credit union system before international organizations and works with national governments to improve legislation and regulation. Its technical assistance programs introduce new tools and technologies to strengthen credit unions' financial performance and increase their outreach.

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