G20 Reaffirms Not Increasing Regulatory Capital Requirements
Volume 6, Number 3
July 13, 2017
G20 Reaffirms Not Increasing Regulatory Capital Requirements
The leaders of the Group of Twenty (G20) nations held their twelfth annual summit in Hamburg, Germany on July 7th and 8th. The G20 Leaders’ Declaration issued at the conclusion of the Hamburg Summit set the upcoming policy agendas for international financial regulatory standard setters including the Basel Committee on Banking Supervision, the Financial Stability Board, and the Financial Action Task Force.
The Leaders’ Declaration reaffirmed the G20’s commitment “to finalise the Basel III framework without further significantly increasing overall capital requirements across the banking sector . . .”, a statement which was also included in the G20 Hangzhou Summit Leaders’ Communique issued in September 2016.
The Hamburg Summit Leaders’ Declaration also pledged “to closely monitor and, if necessary, address emerging risks and vulnerabilities in the financial system” as well as to increase legal entity beneficial ownership transparency to help combat money laundering and terrorist financing. In addition, the G20 expressed support for beginning the automatic exchange of financial account information pursuant to the Organisation for Economic Co-operation and Development’s (OECD) Common Reporting Standard (CRS) in September 2017 with “all relevant jurisdictions to begin exchanges by September 2018 at the latest.”
Basel Committee Makes Key Changes Urged by World Council to Reduce Correspondent Bank “De-Risking”
The Basel Committee on Banking Supervision in June issued the final version of its revised guidance on correspondent banking anti-money laundering and countering the financing of terrorism (AML/CFT) compliance. The final version adopts three of World Council of Credit Unions’ comments that will help reduce banks “de-risking” their customers bases and make it easier for credit unions and other mutuals to establish and maintain correspondent bank accounts.
First, the final version of the Basel Committee standard adopted World Council’s request to clearly cross-reference the Financial Action Task Force’s (FATF) October 2016 guidance on correspondent banking AML/CFT compliance, and the Basel standard also states that it is not intended to set forth new regulatory requirements that are not already included in the FATF’s standards or prior Basel Committee standards.
Second, also as urged by our comments, the final standard expressly incorporates the FATF’s Request for Information protocol as a standardized process for resolving payments red flags.
Third, in response to our argument that credit unions serving government agencies and international organizations do not present high AML/CFT risks, the final standard limits the high-risk treatment of politically exposed persons (PEPs) to foreign PEPs only (i.e. those who do not live in the jurisdiction where the credit union is located).
World Council Opposes Basel Committee Liquidity Proposal
World Council filed comments in June opposing the Basel Committee’s proposal on Global systemically important banks – revised assessment framework, which if finalized would create a new short-term liquidity indicator for global systemically important banks (G-SIBs) that would likely have unintended consequences for financial cooperatives that are bank customers. G-SIBs include most internationally active banks that have more than EUR 200 billion in total assets. If finalized as proposed, the new short-term liquidity metric would apply to wholesale funding with less than six months remaining duration, and would likely increase the reserve requirements of G-SIBs that have financial cooperatives as depositors.
Our comments argued that a new short-term wholesale funding metric for G-SIBs would be likely to have unintended consequences for community-based financial institutions that are depositors of G-SIBs, including reducing the yields that financial cooperatives earn on their bank deposit investments. We also argued that existing Basel III liquidity metrics—i.e. the Liquidity Coverage Ratio and the Net Stable Funding Ratio—are sufficient to ensure safe and sound liquidity positions for deposit-taking G-SIBs. In addition, we provided the Committee with extensive data demonstrating that credit unions’ deposits held by banks are sticky and stable.
World Council Urges NCUA to Authorize Supplemental Capital for Federal Credit Unions
World Council filed comments with the National Credit Union Administration (NCUA) of the USA in May urging the agency to authorize retail-level federally chartered credit unions to issue capital shares as a form of supplemental regulatory capital.
Our comments argued that Section 107(6) of the Federal Credit Union Act allows NCUA to authorize federal credit unions to issue capital shares “representing equity” that could be similar to the Basel III Common Equity Tier 1 capital shares recently approved for Canadian federal credit unions. We also argued that issuing capital shares is consistent with credit unions’ tax-exempt status because credit unions in the USA issued equity shares as early as 1908.
In addition, our comments urged NCUA to utilize the “transitional” expected credit loss capital add-back option recently approved by the Basel Committee, which allows institutions to add back the increased reserves required by International Financial Reporting Standard 9 (IFRS 9) and US GAAP’s Current Expected Credit Losses to the numerator of their capital ratios for up to five years.
Michael S. Edwards
VP & General 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