Credit Unions Ask for Basel III Liquidity Rules Revision
Volume 2, Number 5
August 29, 2013
Credit Unions Ask for Basel III Liquidity Rules Revision
The European Network of Credit Unions (ENCU) filed a comment letter earlier this month with the European Banking Authority (EBA) asking the EBA to revise its draft European Union (EU) Basel III liquidity rules to treat credit unions' deposits at banks more favorably. The Basel III liquidity rules are likely to affect credit unions around the world because credit unions' bank counterparties must be Basel III compliant even when—as in the EU—credit unions are not subject to Basel III.
The letter follows on ENCU meetings with the EBA and European Commission in May, and urges the EBA to clarify that bank deposits made by credit unions are not equivalent to "wholesale funding provided by other legal entity customers." It also asks the EBA to reclassify credit unions' bank deposits as "retail" or "small business" for liquidity purposes based on the deposits' "sticky and stable" behavior.
Under Basel III's "Liquidity Coverage Ratio" for short-term liquidity management, the assumed run-off rate for a bank's "wholesale funding provided by other legal entity customers" in a crisis is 100%, but the assumed run-off rate for "retail" or "small business" deposits is usually only 5% or 10%. A higher assumed run-off rate requires a bank to hold more capital and "high quality liquid assets" to control for the greater likelihood that those deposits will be withdrawn suddenly, which increases the cost of those deposits. A second Basel III liquidity ratio, the "Net Stable Funding Ratio," sets similar rules for medium-term and long-term liquidity management.
In the Republic of Ireland, early adoption of the Basel III liquidity rules has resulted in Irish credit unions' deposits at banks being reclassified from "retail" or "small business" to "wholesale funding provided by other legal entity customers" even though Irish credit unions did not withdraw their deposits from banks during the global financial crisis as the "wholesale funding provided by other legal entity customers" classification assumes. Reality was quite the opposite: Irish credit unions significantly increased their deposits at Irish banks during the financial crisis, from €3.4 billion in 2007 to €6.7 billion in 2012.
Irish banks have cited the increased cost of capital related to deposits that are "wholesale funding provided by other legal entity customers" as a reason to reduce the interest that they pay on credit unions' deposits. Banks that were paying as much as 3% annual interest on credit unions' term deposits before Basel III implementation have lowered their rates offered to credit unions to as low as 0.6%. This reduction in interest rates will likely cost Irish credit unions €60 million or more a year in lost interest income.
In addition to meeting with the EBA and the European Commission, World Council and the Irish League of Credit Unions have also met with representatives from the Basel Committee on Banking Supervision, the Consultative Group to Assist the Poor, and the World Bank to bring credit unions' concerns about the Basel III liquidity rules to their attention. We have asked these standard setting bodies to issue as soon as possible new guidance that would allow credit unions' deposits at banks to be classified as "retail" or "small business" deposits under Basel III.
Basel Anti-Money Laundering Guidance Open for Comment
The Basel Committee on Banking Supervision has released a consultative document entitled Sound management of risks related to money laundering and financing of terrorism for public comment until September 27, 2013.
The consultative document is intended to provide bank supervisors and financial institutions with operational guidance on Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) compliance to compliment the Financial Action Task Force's "40 Recommendations" for AML/CFT. The consultative document proposes revised guidelines for combatting money laundering and the financing of terrorism, including:
- Essential requirements for a comprehensive AML/CFT compliance program;
- Risk assessments and AML/CFT policies;
- Customer Due Diligence (CDD) requirements;
- CDD performed by third parties; and
- Ongoing monitoring and reporting of suspicious activities and transactions.
Please see World Council's detailed Summary and Request for Comment on the Basel AML/CFT proposal for additional details, and provide us with any comments you may have by September 20th so that we can incorporate your views into our comment letter to the Basel Committee.
Please do not hesitate to contact me if you have any questions. Thank you very much and have a nice day.
Michael S. Edwards
Chief Counsel and VP for Advocacy & Government Affairs
World Council of Credit Unions (WOCCU)
601 Pennsylvania Ave., NW, Washington, DC 2004-2601 USA
Office: +1-202-508-6755 | Mobile: +1-215-668-5240 | Fax: +1-202-638-3410
medwards@woccu.org | www.woccu.org