Rebalance Capital Requirements, WOCCU Tells Basel Committee

Study Shows Small Institutions Strengthen Economic Environment by Spreading Risk

March 26, 2009

MADISON, Wis.—World Council of Credit Unions (WOCCU) is calling for a fundamental review of the Basel II capital framework by the Basel Committee on Banking Supervision to ensure that smaller institutions and credit unions that have fared better during the economic recession aren't subject to tougher capital requirements than larger, riskier institutions that present systemic risk.

In a series of three letters to Basel Committee Chairman Nout Wellink, Dave Grace, WOCCU's vice president of association services, urged the committee to "rebalance" inconsistencies outlined in the current series of consultative documents that classify small financial cooperatives together with large, more complex banks.

WOCCU's actions come on the heels of a March 12 Basel Committee announcement that all financial institution capital levels will need to be raised to increase resilience to future episodes of economic and financial stress. The process will include increases not only in the amounts, but also the quality of capital required; improving the risk coverage of capital structures; and enacting supplementary protective measures.

Cooperative financial institutions play a vital role, not only in serving the financial needs of 857 million consumers worldwide, but by spreading economic risk over a greater number of institutions. By contrast, existing industry risk-modeling standards have failed to keep large banks from hemorrhaging losses that have fed the global economic downturn. Smaller institutions, especially member-owned financial cooperatives, hold smaller concentrations of funds, strengthening the global financial network by reducing the risk each institution poses.

"While we understand the committee's interest in advancing risk modeling, the current crisis may indicate that existing models were not well developed to begin with, causing many banking sectors to suffer high levels of concentrated risk among few institutions," Grace wrote in one of the letters dated March 13. Grace noted that no financial cooperatives have been bailed out with taxpayer dollars and, according to a 2007 International Monetary Fund study, financial cooperatives in general are more stable than commercial banks, especially considering threats to their viability based on earnings and capital.

Basel II provides opportunities for larger entities to hold comparatively less capital than smaller institutions. However, the current crisis has shown that many larger institutions are riskier and prone to greater systemic problems. Failure to rebalance capital requirements within Basel II to appropriate levels will potentially weaken smaller institutions. Fair capital requirements for institutions of all sizes not only aid financial cooperatives' operating capabilities, but they strengthen the soundness and stability of the international banking system, Grace wrote to the committee.

WOCCU's position also emphasized the need for stress-testing procedures appropriate to financial cooperatives.

"Unfortunately, it's taken a crisis of the currrent magnitude to demonstrate our point that credit unions are conservatively managed institutions with lower risk profiles on average than larger commercial banks," Grace said. "Our message to the Basel Committee is, essentially, ‘Don't punish us - we're not banks.' Modifying the edges of Basel II as the proposals suggest may cover some existing gaps but will do little to lessen the blow of future problems in the financial sector."

Capital-level compliance by global financial institutions in response to the Basel Committee's March 12 announcement will not come under review until 2010 due to the financial industry's current inability to meet the newly defined capital levels.

In addition to writing the three letters, Grace will be representing WOCCU in an April 15 meeting with Wellink in Amsterdam to ensure policymakers take into account credit unions' needs. To view all three letters in their entirety, please visit the WOCCU Website's advocacy section at

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.

World Council has implemented 300+ technical assistance programs in 89 countries. Worldwide, 68,882 credit unions in 109 countries serve 235 million people. Learn more about World Council's impact around the world at

Organization: World Council of Credit Unions
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