Basel Committee Significantly Revises Weak Banks Guidance in Response to World Council Comments

Volume 4, Number 4
August 24, 2015

Basel Committee Significantly Revises Weak Banks Guidance in Response to World Council's Comments


The Basel Committee on Banking Supervision has recently issued the final version of its Guidelines for Identifying and dealing with weak banks. The Committee’s guidance defines “weak banks” as institutions “whose liquidity or solvency is impaired or will soon be impaired unless there is a major improvement in its financial resources, risk profile, business model, risk management systems and controls, and/or quality of governance and management in a timely manner.” The guidance includes practical approaches for identifying weak banks as well as best practices for weak bank corrective action, resolution and exit strategy. 

The final version of the Committee’s guidance incorporates several significant changes that World Council of Credit Unions (World Council) urged in our September 2014 comment letter to the Committee. 

Most significantly, at our request the Committee removed proposed language which would have said that all financial institutions should be “subject to the same supervisory and regulatory framework” regardless of asset size or charter type.  Instead, the final version of the guidance states that supervisory actions for dealing with weak banks “should be consistent and well understood . . .  so that similar problems in different banks, large or small, private or state-owned, will receive similar treatment.”

In addition, the Committee removed proposed language that would have generally required “changes in the legal structure of the banking group” and “forced restructuring” of weak banks that World Council strongly opposed on the basis that these statements could be interpreted as requiring involuntary demutualization of credit unions.  The final version of the guidance instead states that “[r]esolution instruments . . . employed when failure is imminent . . . will typically involve stronger supervisory intervention and some changes to the legal structure and ownership of the bank.”

The Committee’s adoption of these changes should help limit significantly the regulatory burdens that this new standard imposes on credit unions, as well as help preserve the viability of the cooperative financial intuition model in general.

Basel Committee Finalizes Corporate Governance Principles with Provisions Limiting Regulatory Burdens on Credit Unions


The Basel Committee has also recently released the final version of its guidance on Corporate Governance Principles for Banks. The Committee’s final corporate governance guidance paper sets forth the its expectations for financial institution supervisors and board members with respect to the implementation of financial institutions’ risk management systems, the qualifications of financial institution board members (such as fitness and propriety standards), and similar issues concerning banking institution corporate governance.

World Council supported most aspects of the proposal in our January 2015 comment letter because the Committee included several statements intended to limit the standard’s regulatory burdens on smaller financial institutions like credit unions.   Most significantly, the final guidance paper includes the following statement that we had strongly urged the Committee to finalize as proposed: “The implementation of these principles should be commensurate with the size, complexity, structure, economic significance and risk profile of the bank and the group (if any) to which it belongs. This means making reasonable adjustments where appropriate for banks with lower risk profiles, and being alert to the higher risks that may accompany more complex and publicly listed institutions.”

The Committee also added a statement that its guidance “does not advocate any specific board or governance structure” in response to World Council’s comments that that the Basel standard should be compatible with longstanding corporate governance features found in many credit union systems, such as a board of directors comprised of unpaid volunteers and an internal audit function performed by a supervisory committee.

We believe that this Basel Committee guidance will help bring regulatory relief to credit unions around the world that are facing disproportionate fitness and propriety standards for credit union officers and directors, or are otherwise under pressure to alter their corporate governance structures arbitrarily because of supervisory expectations based on commercial banking models.

Financial Action Task Force “De-Risking” Guidance Project Authorized

The Financial Action Task Force (FATF) has officially announced that it will issue guidance on the growing phenomenon of financial institutions “de-risking” their customer bases by ceasing to do business with other financial services companies because of anti-money laundering and countering the financing of terrorism (AML/CFT) concerns.   World Council urged the FATF to begin this guidance project on “de-risking” at a FATF Consultative Forum held in March 2015 in Brussels, Belgium because many credit unions have either faced regulatory pressure not to do business with members that have higher AML/CFT risks, such as money services business, or have had trouble maintaining correspondent relationships with banks because of perceived AML/CFT risks.

One likely reason for the “de-risking” phenomenon is that many bank and credit union supervisors have previously interpreted the FATF’s AML/CFT recommendations as requiring institutions that have financial services companies as customers to engage in due diligence on those customers’ customers.

The FATF’s announcement, made after the FATF’s June plenary meeting, clarifies that “the FATF Recommendations do not require banks to perform, as a matter of course, normal customer due diligence on the customers of their respondent banks when establishing and maintaining correspondent banking relationships.”

The FATF also indicated that the guidance developed by its working group will further clarify the interplay between the FATF standards on correspondent banking and the FATF standards on customer due diligence and wire transfers.  It is likely that the FATF will develop a proposed version of its de-risking guidance for consultation in spring 2016 with a final version of the guidance being issued later that year. 

ENCU Submits Credit Union Term Deposit Investment Data to European Banking Authority

The European Network of Credit Unions (ENCU) filed a comment letter with the European Banking Authority on July 14th regarding the Net Stable Funding Ratio, which is Basel III’s medium-term liquidity metric.  European credit unions are exempt from the European Union’s (EU) Basel III liquidity rules, but are impacted by them indirectly because the rules require banks to hold additional reserves against deposits made by credit unions and other financial institutions.  The ENCU comment letter follows more than two years of advocacy by the ENCU and World Council to achieve Basel III liquidity rules that allow credit unions to maintain a reasonable return on their investments in bank deposits.

The primary purpose of the ENCU’s comment letter was to respond to a request from the Authority, made during the ENCU’s May 2015 meeting with the Authority at its offices on Canary Wharf in London, England, for data concerning European credit unions’ investments in bank term deposits.  The ENCU’s submission included extensive data on investments in term deposits made by credit unions in Ireland, Britain and Poland.

The Authority is expected to issue a report on the Net Stable Funding Ratio to the European Commission by the end of this year, after which the Commission will develop a final set of Net Stable Funding Ratio rules for Europe.  Based on our submission and other advocacy efforts, we are optimistic that the Authority will recommend concessionary liquidity treatment for credit unions’ investments in term deposits as it did in an earlier, December 2013 report on Basel III’s short-term liquidity metric called the Liquidity Coverage Ratio.  The Authority’s December 2013 report resulted in an EU Liquidity Coverage Ratio regulation which reduced by 60 percent the reserves that banks must hold against short-term deposits made by credit unions.  The EU’s final rules on the Net Stable Funding Ratio are expected in 2016.


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 |

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