Australia: Credit Unions Pursue Capital Options in Basel III Framework
The Australian Prudential Regulatory Authority (APRA), Australia's safety and soundness supervisor of credit unions and other mutual depository institutions, has revised its regulatory capital rules to give credit unions, building societies and mutual banks more flexibility to issue Basel III-compliant regulatory capital instruments while retaining their customer-owned structure.
APRA implemented its original Basel III capital rules in January 2013. Credit unions and other customer-owned banking institutions were confronted with reduced capital formation options under those rules because they only considered retained earnings and paid-in and additional paid-in capital from issuances of listed company common stock to be Basel III "Common Equity Tier 1" (CET1) capital.
CET1 capital is the most desirable form of regulatory capital under Basel III because it is a component of the numerator in the Basel III leverage ratio as well as in all three of its risk-based capital ratios. Basel III "Additional Tier 1" capital—a category typically including preferred shares and hybrid debt-equity instruments—is also included in the numerator of the Basel III leverage ratio but is only an element of the numerator in two of the three Basel III risk-based capital ratios. "Tier 2" capital—a category including subordinated debt—is not included in the numerator of the Basel III leverage ratio and is included in the numerator of only one of the risk-based capital ratios. For more details on Basel III credit union regulatory capital, see World Council's white paper Credit Union Shares as Regulatory Capital under Basel III.
APRA has worked with the Customer Owned Banking Association (COBA) to resolve this problem by approving a new form of CET1 capital for mutual institutions, known as "mutual equity interests," that is compliant with the Basel III framework. APRA says the change is consistent with discretion given to supervisory authorities under the Basel III capital framework to take into account the specific constitution and legal structure of non-joint stock companies, such as mutuals, provided that the substantive quality of regulatory capital is preserved in terms of ability to absorb losses and so forth. The Bank of England Prudential Regulatory Authority (PRA) authorized a similar approach for Nationwide Building Society of Great Britain, which issued CET1 Core Capital Deferred Shares (CCDS) in 2013.
Australia's mutual banking institutions are strongly capitalized and will continue to rely on retained earnings as their primary source of regulatory capital. The change, however, provides additional flexibility for capital management by allowing mutuals to issue supplemental capital instruments with a "conversion" clause that would allow the supplemental capital to convert to CET1 instruments with a lower face value if a "trigger event" occurs, such as the institution's losses exceeding its retained earnings. In such a conversion, for example, the supplemental capital holders could receive AUD 3 in CET1 for every AUD 10 in supplemental capital they held prior to the "trigger event."
Under Basel III, the only other option for impaired supplemental capital besides converting the supplemental capital to CET1 would be for the supplemental capital instruments to be written down permanently as losses occur. The "conversion" option will therefore likely make mutual supplemental capital instruments more attractive to investors.
In other news from Australia, a major Financial System Inquiry is about to deliver its interim report, renewing debate about Australia's highly concentrated banking market and four dominant banks. COBA's submission to the inquiry calls for a range of changes to promote a level playing field and improve competition in the banking market.
Canada: Big Changes Afoot
Federal Income Taxation: In 2013 the Canadian federal government hiked the credit union federal income tax rate from 11% to 15%, reversing a 40-year-old policy that ensured credit unions were taxed at a lower rate than their big bank competitors. Since then credit unions have been engaged in a growing advocacy campaign to explain why taxing credit unions more is poor public policy and advocating for a new Capital Growth Tax Credit (CGTC). The proposed CGTC will help credit unions grow their retained earnings and boost credit union competitiveness. Details about the CGTC can be found here: CGTC
Regulation of Central Credit Unions: In Budget 2014 the Government of Canada announced that it intends to disengage from regulating and supervising credit union Centrals, the provincial-level credit union federations that operate as wholesale "credit unions for credit unions." This disengagement will have far reaching consequences because it will compel provincial governments to reconsider how they regulate Centrals, a role they have historically shared with the federal government. Credit Union Central of Canada is working with provincial Centrals, governments and regulators to determine how best to manage the transition so that the credit union system is not disadvantaged by the shift in supervision. The Government has proposed that the transition take place over a two-year timeframe, but details are yet to be finalized.
Federal Credit Unions: New measures were included in Budget 2014 to facilitate the establishment of federal credit unions. The measures include a streamlined merger process, extended deposit insurance support and a grace period to allow a federal credit union with insurance business to segregate it out in compliance with federal laws.
Regulatory Compliance: New anti-money laundering regulations, new legislation enacting the intergovernmental agreement (IGA) regarding FATCA obligations, and a new anti-spam regime all came into force in the first half of the year.
Updates on Canadian credit union legislative and regulatory affairs can be found here: Cdn CU Updates
Great Britain: Regulatory Framework reform continues
The British credit union sector is becoming more acclimated to the "twin peaks" regulatory framework that the British Government established in 2013 where the Bank of England Prudential Regulatory Authority (PRA) oversees credit union safety and soundness regulation and the Financial Conduct Authority (FCA) regulates consumer protection and other conduct issues. The new regulators have increased the focus on credit union governance standards and management competence, setting the stage for stricter prudential rules to come into effect beginning in September 2014. The Association of British Credit Unions Ltd. (ABCUL) anticipates that there will be a full review later in 2014 of the PRA's and FCA's rulebook for credit unions, CREDS - the Credit Unions Sourcebook, which will mean further reforms to credit union regulation in Britain.
In addition to changes in British credit union rules, credit unions that use banks for investment and/or correspondent services are facing growing difficulties as an indirect result of more stringent bank regulations. Many credit unions have seen yields on term deposits fall markedly as well as an increasing reluctance from banks to do business with credit unions due to the compliance costs imposed by Basel III and Anti Money Laundering/Countering the Financing of Terrorism (AML/CFT) regulations on banks that do business with other financial institutions.
ABCUL is hopeful that these difficulties can be surmounted, however, because support for credit unions from the Archbishop of Canterbury and the Church of England has made many banks keen to support credit union growth. Lloyds Banking Group, for instance, recently announced a GBP 4 million investment over four years in credit union expansion via ABCUL's charitable arm, the Credit Union Foundation .
Finally, the Government's support for the credit union sector continues with the delivery of the Credit Union Expansion Project which uses Government investment to build a central shared banking platform and business model for the credit union movement. This shared business model should enable improved efficiency, consistency and quality of service to enable sustainable growth. The Government has also recently announced a Call for Evidence on measures it can take to further support the growth and expansion of credit unions in their 50th Anniversary Year.
Ireland: Introduction of Stablization Levy on Credit Unions
In the Republic of Ireland, the Department of Finance has recently issued a consultation paper on the introduction of a levy on credit unions to create a stabilization fund to provide support to credit unions that have regulatory reserves equal to or greater than 7.5% of the total assets (but less than the 10% required to be adequately capitalized) and the institution is, in the opinion of the Central Bank of Ireland , viable as a credit union. The Department of Finance proposes a stabilization fund of EUR 30 million to be built up over 6 years.
In December 2013 the Central Bank published a Consultation Paper on a "tiered" approach to credit union supervision that would establish "tiers" of rules that would be proportional to an institution's nature, scale and complexity. In June, after reviewing the first round of comments, the Central Bank issued a response paper favoring a two-tiered approach, with one tier of relatively simple rules for small credit unions and a more stringent tier of rules for larger, more complex institutions. The next stage in the process will be the publication of a second consultation paper and a regulatory impact analysis in September 2014.
In Northern Ireland, the Department of Enterprise, Trade and Investment (DETI) has issued a consultation paper on proposals to reform the law on credit unions in Northern Ireland. The proposed legislation will be based on recent legislative reforms for credit unions in Great Britain and the topics being considered include the abolition of the minimum age for membership (i.e. minors would be given full membership rights), new consumer disclosures, expansion of the common bond, removal of restrictions on "non-qualifying members" (i.e. members who no longer fall within the credit union's common bond), group membership, interest-bearing shares, deferred shares, attachment of shares and interest rate increases. Work is ongoing by DETI on the draft legislation, with legislative debate on the proposal expected to begin in the near future.
Kenya:Sacco Licensing Transition Period Ends; Regulatory Consolidation Possible
The Saccos Societies Act's deadline for Sacco societies operating as "Deposit-Taking" institutions to obtain a Deposit-Taking license came to a close on June 17, 2014. SASRA has so far licensed 184 Saccos out of the 215 Saccos that had applied for Deposit-Taking licenses. Saccos that do not have a Deposit-Taking license cannot offer withdrawable savings products or other "Front Office Sacco Activities" (FOSA) services.
The Sacco Societies Regulatory Authority (SASRA) and the Ministry of the National Treasury are consulting with members of the Keynan Sacco movement regarding phase-out of FOSA services by the 31 Saccos that applied for a Deposit-Taking license but have not been approved.
The Kenyan Government is also contemplating a possible reorganization of its financial regulatory agencies, including SASRA. The Government has proposed to establish a consolidated financial sector regulatory framework by bringing together SASRA, the Capital Markets Authority (CMA), the Insurance Regulatory Authority (IRA) and the Retirement Benefits Authority (RBA) to form a new supervisory agency called the "Financial Services Authority."
New Zealand: Continuance of Credit Union Reform
The year 2014 continues to be one of significant changes for New Zealand credit unions' regulatory environment. The most significant reform for credit unions to date is the requirement by their prudential regulator, the Reserve Bank of New Zealand, to be licensed. Under the new rules all Non—Bank Deposit Takers—including credit unions, building societies, and finance companies—must become licensed. The licensing process requires credit unions to complete a rigorous application process, and also requires their directors and senior managers to meet fitness and propriety suitability requirements. This process must be completed by April 2015.
A second major change is that an overhaul of New Zealand's securities laws will make substantive changes to credit union disclosure requirements by the end of this year. New Zealand credit unions are subject to these disclosure requirements because they issue debt securities. The industry has spent the first half of this year consulting on the proposed disclosure regulations and expects to see finalized requirements in the beginning of quarter three. Most of the disclosure reforms are welcomed by the credit unions because the new rules will be better adapted to credit unions' relatively simple savings products.
In addition, New Zealand's Parliament has recently enacted credit contract reform legislation. This new law will institute responsible lending rules, improvements to lending disclosure requirements, and a much needed overhaul of the procedures required to repossess collateral. All provisions in the new credit contract reform act are expected to come into force within the next 12 months.
Papa New Guinea: Progress of the Review of the Savings & Loan Act
Papua New Guinea (PNG) is considering legislation that would make significant revisions to the PNG Savings and Loan Act for the first time in 20 years. The current Savings & Loan Societies Act was originally enacted in 1962 and most recently amended in 1995. Since 1995, however, there have been many technological innovations in the sector as well as significant changes to the international standards for financial institution regulatory capital and governance practices.
Proposed amendments to the Act would make the Bank of Papua New Guinea responsible for licensing savings and loans societies and the Registrar of Companies responsible for registration of savings and loan society charters. The proposed legislation would also establish a minimum initial capital requirement of PGK 100,000 (about USD 40,000) and would require new savings and loan societies to pay licensing fees and renewal fees to the Bank.
The proposed Savings and Loan Act amendment will be presented to PNG's Parliament for debate and possible passage in the second half of 2014.
Source: Federation of Savings and Loan Societies Ltd. of Papua New Guinea
United States: Risk-Based Capital System Under Debate
The United States' federal regulator of credit unions, the National Credit Union Administration (NCUA), has issued a proposal to replace the agency's current risk-based net worth system for credit unions with a Basel III-style risk-based capital regulation.
The proposal would apply to credit unions with assets over USD 50 million, and requires higher capital for credit unions with concentrations in real estate loans, member business loans, and credit union service organization investments. The rule, if finalized as proposed, would also allow the agency to set higher capital requirements for individual credit unions on a case-by-case basis.
NCUA's proposal has been tremendously worrisome for US credit unions, and the Credit Union National Association (CUNA) has led an effort by credit unions to get NCUA to improve the proposal before it is finalized. Credit union stakeholders filed more than two thousand comment letters in opposition to the proposal, and more than two-thirds of the members of the United States Congress have written NCUA's leadership to express concern about the proposal.