Comment Letter Roundup!
Volume 5, Number 4
October 24, 2016
Comment Letter Roundup!
International financial policymakers have kept World Council of Credit Unions very busy over the past several months with an unusually high number of proposals related to the official finalization of the Basel III capital accord as well as proposed standards on loan loss provisioning, anti-money laundering, and capital accounting. This “Comment Letter Roundup!” edition of The Telegraph summarizes World Council’s comment letters in response to these recent proposals.
Financial Action Task Force: Draft Correspondent Banking Guidance Likely to Reduce “De-Risking” Once Finalized
World Council recently filed a comment letter with the Financial Action Task Force (FATF) in response to the FATF’s proposed guidance on correspondent banking Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) rules. The FATF included World Council as part of this non-public, directed consultation because of World Council’s participation in the FATF’s by-invitation-only Private Sector Consultative Forums.
The FATF’s draft correspondent banking guidance represents the final stage of a three-year advocacy effort by World Council to reduce the effects of correspondent banks “de-risking” their client bases by ceasing to do business with credit unions in many jurisdictions including the Caribbean, Great Britain, and the USA. If finalized as proposed, the FATF’s new guidance on correspondent banking should significantly reduce the “de-risking” phenomenon and make it easier for credit unions and other mutuals to establish and maintain correspondent banking relationships in all jurisdictions.
Our comments supported most aspects of the proposal, which were broadly consistent with comments World Council has made previously to the FATF including at a consultative meeting in Vienna, Austria in April 2016 and in written comments we filed with the FATF in November and December 2015.
In addition, our comments urged the FATF to use the term “correspondent financial institution” rather than “correspondent bank” to reduce potential confusion concerning banks or central credit unions providing correspondent banking services to credit unions and building societies. We also urged the FATF to include language concerning proportional application of this guidance as well as to expand the purview of the guidance to include domestic correspondent banking activities in addition to international ones. The final version of this FATF guidance will likely be released before the end of 2016.
International Accounting Standards Board: Comment in Response to Directed Consultation on Coop and Mutual Shares as Equity
World Council recently filed a comment letter in response to a non-public, directed consultation we received in July from the International Accounting Standards Board. The Board contacted World Council to request additional comments on the issue of when shares issued by credit unions and other mutuals should qualify as equity. Specifically, the Board requested copies of regulatory capital standards applicable to shares issued by financial cooperatives and other mutuals from us in response to our November 2015 comment letter on the Board’s Conceptual Framework for Financial Reporting exposure draft.
Credit union shares and similar mutual capital instruments must qualify as equity on an accounting basis in order to be eligible for inclusion in Basel III “Common Equity Tier 1” capital—the most desirable form of regulatory capital under Basel III—and an equity classification is also often required for an instrument to be included in “Additional Tier 1” capital, the second most desirable form of Basel III capital.
Our 13-page, September 2016 comment letter to the Board included detailed examples of the regulatory requirements for cooperative and mutual capital instruments issued by credit unions and other mutuals in Australia, Canada, the European Union (i.e. EU law), Great Britain (i.e. British law), and the USA.
The International Accounting Standards Board will likely finalize its Conceptual Framework for Financial Reporting within the next six months. The Board’s International Financial Reporting Standards Interpretations Committee will also likely issue guidance specifically on cooperative shares within the next two years, however, this issuance will merely be an interpretation of the Conceptual Framework and the Interpretations Committee will have relatively little discretion to deviate from the Conceptual Framework’s approach once it is finalized.
Basel Committee: Comment on Non-Performing Exposures
World Council recently filed a comment letter with the Basel Committee on Banking Supervision in response to its proposal on Prudential Treatment of problems assets – definitions of non-performing exposures and forbearance.
We supported the Committee’s proposal to define “nonperforming exposures” as loans that have been in arrears for 90 days or more, and also supported the Committee’s proposal to assess retail exposures on a transaction-by-transaction basis (rather than treating all of a retail borrower’s loans as non-performing when he or she has only missed payments on one loan).
In addition, our comments urged the Committee to revise its definition of “default” to eliminate large banks’ option to treat non-performing loans as non-defaulted for a longer time period than would be allowed for a credit union or other mutual following the Basel III standardised approach.
Basel Committee: Comment on Revisions to the Basel III Leverage Ratio
World Council recently filed a comment letter with the Basel Committee on Banking Supervision in response to its proposal on Revisions to the Basel III leverage ratio framework. Our comments supported the Committee’s proposal to exclude from the Basel III leverage ratio exposure measure the amount of any general and specific provisions that have decreased Tier 1 capital. We also supported similar treatment for off-balance-sheet items reserved for out of Tier 1 capital.
Our comments opposed, however, the Committee’s proposal to include the undrawn portions of unconditionally cancelable open-end lines of credit, such as credit cards and similar revolving credit facilities, within the denominator of the leverage ratio. We argued that including the proposed 10 to 20 percent of the undrawn portions of unconditionally cancelable lines of credit like credit cards within the denominator of the leverage ratio would likely have negative economic consequences for consumers and small businesses as well as for the global economy as a whole.
Basel Committee: Comment on the Internal Ratings-Based Approach to Credit Risk
World Council recently filed a comment letter with the Basel Committee on Banking Supervision in response to the Committee’s proposal on Reducing variation in credit risk-weighted assets – constraints on the use of internal model approaches (March 2016). Our comments supported the Committee’s proposal to limit large banks’ ability under current rules to write, in effect, their own Basel III capital requirements through the use of internal modeling.
In general, these large banks have created models that allow them to hold less capital against specific types of assets than a credit union or other mutual following Basel III’s standardised approach would have to hold. The ability effectively to write their own capital rules gives these banks an even greater competitive advantage over credit unions and other mutuals than big banks’ larger economies of scale already confer.
If finalized as proposed, this Basel standard will impose capital floors on large banks that use the internal modeling approach that will make their risk-based capital requirements more similar to those applicable to smaller institutions that are subject to standardised approaches.
Basel Committee: Comment on the Standardised Measurement Approach for Operational Risk
World Council recently filed a comment letter with the Basel Committee on Banking Supervision in response to its proposal on the Standardised measurement approach for operational risk. Our comments strongly supported the Committee’s proposal to limit mandatory application of this standard to “internationally active banks.” If finalized as proposed, this aspect of the proposal will mean that national supervisors will not be required to apply these rules to credit unions or other community-based mutual financial institutions.
Our comments also supported the proposal to exempt all or virtually all credit unions and community-based mutuals from the proposed “Loss Multiplier” reserve requirement. In addition, we supported the proposal to place all or virtually all credit unions and other community-based mutuals in the lowest tier of a 5-tier set of marginal rates that will form the standardised approach’s reserve methodology for operational risk. Further, we supported the Committee’s proposal to withdraw the internal modeling approaches to operational risk currently utilized by large banks, which should help reduce the competitive advantages those banks enjoy over smaller institutions.
Michael S. Edwards
VP & General Counsel
World Council of Credit Unions (WOCCU)
601 Pennsylvania Ave., NW, Washington, DC 20004-2601 USA
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