G20 Update & Revised Basel III NSFR
Volume 3, Number 5
November 20, 2014
G20 Update: G20 Endorses OECD Global Tax Information Exchange System Modeled on FATCA
The Group of 20 (G20) nations met in Brisbane, Australia on November 15-16th for the annual G20 Leaders' Summit.
Notably for credit unions, the G20 endorsed the Organisation for Economic Co-operation and Development’s (OECD) recently finalized Automatic Exchange of Information Common Reporting Standard for non-residents’ financial accounts. The OECD’s Common Reporting Standard is modeled on the United States’ Foreign Account Tax Compliance Act (FATCA) and is intended to help combat tax-evasion by individuals who are using “offshore” financial accounts, i.e. accounts located in jurisdictions where they do not reside, to hide investment income from their home countries’ tax authorities. Credit unions subject to the Common Reporting Standard will be required to make annual reports to their jurisdiction’s tax authority about accounts held by members who are not local residents, including those accounts’ balances.
Fifty-two jurisdictions have signed the OECD’s multilateral Common Reporting Standard agreement, including Bermuda, the British Virgin Islands, the Cayman Islands, Colombia, Estonia, the Republic of Ireland, the Republic of Korea, Mexico, Montserrat, the Netherlands, Poland, Romania, and the United Kingdom. Most of these 52 jurisdictions have pledged to adopt the Common Reporting Standard and begin exchanging information about non-residents’ financial accounts by September 2017.
Australia, Brazil, Canada, and the United States have not yet signed the OECD’s multilateral agreement, however, the G20 leaders including the Prime Ministers of Australia and Canada and the Presidents of Brazil and the United States jointly stated in the G20 Leaders Commuique that they intend to introduce legislation to implement the Common Reporting Standard in their countries: “We will begin to exchange information automatically with each other and with other countries by 2017 or end-2018, subject to completing necessary legislative procedures.”
In addition to the OECD’s Common Reporting Standard, the G20 endorsed the Financial Stability Board’s (FSB) plan to finalize its proposed guidance on “Adequacy of loss absorbing capacity of global systemically important banks in resolution” that FSB issued for public comment on November 10th. The G20 also approved new high-level principles on increased transparency of legal entity beneficial ownership in anti-money laundering and countering the financing of terrorism (AML/CFT) customer due diligence, as well as an updated G20 Financial Inclusion Action Plan developed by the Global Partnership for Financial Inclusion.
Revised Basel III Net Stable Funding Ratio Finalized
The Basel Committee on Banking Supervision (BCBS) released the final version of its revised Net Stable Funding Ratio (NSFR)—the medium-term liquidity metric under Basel III—on October 31st. The NSFR requires banks and other institutions subject to Basel III to hold reserves of “high-quality liquid assets” to control for liquidity risk. Even though the NSFR is intended to apply to large banks (and not to most credit unions), the NSFR indirectly affects credit unions that invest in term deposits because the NSFR’s reserve requirements make those deposits more expensive for banks or central credit unions to hold.
The BCBS’s revised NSFR standard is a positive development for credit unions because it will reduce significantly the reserves that banks and central credit unions must hold against 6 to 12 month term deposits made by natural person credit unions of any asset size. The lower reserve requirements will reduce the banks’ and central credit unions’ effective cost of funds with respect to these deposits, allowing the natural person credit unions to receive better yields than was possible under the BCBS’s original NSFR standard issued in 2010.
The revised NSFR assigns term deposits made by credit unions with 6 to 12 months remaining duration a 50% "Available Stable Funding" (ASF) rating, instead of the 0% ASF rating assigned to these types of deposits under the original NSFR. Reserve requirements for banks and central credit unions subject to Basel III will therefore likely be reduced by half with respect to 6 to 12 month term deposits made by natural person credit unions.
Term deposits made by natural person credit unions with more than 12 months remaining duration will remain classified as 100% ASF, and term deposits made by natural person credit unions with 1 to 6 months remaining duration will remain classified as 0% ASF.
Most jurisdictions plan to implement the NSFR beginning in 2018 although some jurisdictions, like the Republic of Ireland, have already implemented NSFR rules for large commercial banks. Early adoption of the original NSFR standard for banks in the Republic of Ireland last year reduced the yields Irish credit unions received on their term deposit investments by an average of 100 basis points or more.
Disappointingly, the BCBS did not finalize an aspect of its NSFR proposal supported by World Council and the European Network of Credit Unions that would have given an even more favorable ASF classification to 1 to 12 month term deposits made by small financial institutions (i.e. those with less than EUR 50 million in assets). We believe that the BCBS did not finalize this aspect of the proposal because of concerns that it could allow large banks and investment funds to engage in regulatory arbitrage by doing business with groups of special purpose vehicles that each would be below EUR 50 million in assets.
The revised Basel NSFR is nevertheless a major improvement for credit unions around the globe because its more favorable treatment for 6 to 12 month term deposits will help natural person credit unions achieve better investment returns.
In addition, the European Union (EU) plans to develop its own version of the revised NSFR during 2015 that will apply to European banks and may be more favorable to credit unions than the BCBS’s revised NSFR. The EU’s recently finalized version of the Liquidity Coverage Ratio (LCR)—the Basel III short-term liquidity metric for deposits with less than 1 month remaining duration—already treats credit unions’ bank deposit investments more favorably than the BCBS’s version of the LCR does.
The EU’s LCR rules, issued on October 10th, treat natural person credit unions’ bank deposits that have less than 1 month remaining duration as 40% available to European banks for liquidity management purposes. In contrast, the BCBS’s version of the LCR treats these types of demand and short-term deposits made by credit unions as 0% available to banks for liquidity management.
We would be surprised if the EU settles on Basel liquidity rules that accord credit unions’ demand and short-term bank deposits a better liquidity availability rating under the European LCR than the European NSFR would give to 1 to 6 month term deposits made by credit unions.
The European Network of Credit Unions will be meeting with the European Commission in early December to urge the Commission to develop European NSFR rules that are favorable to credit unions.
Michael S. Edwards
VP and Chief Counsel
World Council of Credit Unions (WOCCU)
601 Pennsylvania Ave., NW, Washington, DC 20004-2601 USA
Office: +1-202-508-6755 | Mobile: +1-215-668-5240 | Fax: +1-202-638-3410
medwards@woccu.org | www.woccu.org