World Council Comments on Basel Committee Correspondent Banking Proposal

Volume 6, Number 1
February 23, 2017

World Council Comments on Basel Committee Correspondent Banking Proposal 

World Council of Credit Unions (World Council) filed a comment letter with the Basel Committee on Banking Supervision on February 22nd supporting some aspects of the Committee’s proposed Revisions to the annex on correspondent banking anti-money laundering/countering the financing of terrorism (AML/CFT) guidance, but also urging the Committee to clarify the proposal’s approach to information sharing to help limit regulatory burdens.

Our comments supported the Committee’s proposed statements that the “level of ongoing monitoring should be commensurate with the respondent banks’ risk profiles” and that “[a]ll correspondent banking relationships should be subject to an appropriate level of due diligence following a risk-based approach . . .”  We urged the Committee to finalize these statements as proposed in order to ensure a proportional approach to correspondent banking AML/CFT regulation that will limit unreasonable compliance burdens on smaller financial cooperatives.

We expressed concern, however, about the proposal’s requirements for extended-character remittance information in payments messages—because this extended-character information can be cut-off by legacy payments system infrastructure—as well as concern about the use of Know Your Customer (KYC) utilities because smaller financial cooperatives may not be included in such databases. 

We urged the Committee to clarify that correspondent banks should liaise directly with financial cooperatives to resolve issues related to payments message ambiguities, incomplete remittance information fields, or if an institution is not listed in a KYC utility.

Credit Union Leaders Discuss Regulatory Relief with the Basel Committee

World Council and senior leaders from our member associations met on January 19th with Basel Committee Secretary General William Coen to discuss reducing regulatory burdens on credit unions and other cooperative financial institutions. 

During the meeting we urged the Basel Committee Secretariat to take concrete steps to limit compliance burdens on smaller financial institutions.  We suggested that the Committee carve out non-internationally active institutions from Basel Committee standards, and also create an industry working group that would give feedback to the Committee on proposals affecting community-based financial institutions.

The Basel Committee representatives said that they would consider our suggestion to form a working group of locally focused financial institutions to serve as a sounding board on regulatory burden concerns.  They also supported giving national regulators the option to exempt credit unions from Basel Committee standards, but did not believe that prohibiting national regulators from applying Basel rules to non-internationally active institutions would be consistent with their mandate.

We also learned that the Committee plans to finalize Basel III with the addition of a capital floor for large banks that use internal modelling approaches under Basel III. 

We expect that the final version of Basel III will include a capital floor for large banks between 65% and 85% of what the large bank’s standardized approach’s capital requirement would be.  The Committee may finalize Basel III at a meeting scheduled for March 1-2, 2017 in Basel, Switzerland.

World Council Comments on Basel Committee Expected Credit Losses Proposals

World Council filed two comment letters with the Basel Committee in January regarding how the Committee should adapt its regulatory capital rules to incorporate expected credit loss accounting standards such as International Financial Reporting Standard 9 (IFRS 9) and the Current Expected Credit Losses (CECL) standard under US Generally Accepted Accounting Principles.  

In our comment letter to the Committee on its proposed Regulatory treatment of accounting provisions – interim approach and transitional arrangements, we supported the Committee’s proposed transitional approach that would add-back the additional loan loss reserves required by IFRS 9 or CECL to an institution’s Common Equity Tier 1 (CET1) capital.  This add-back to CET1 capital—the most desirable form of capital under Basel III, which also includes retained earnings—would be amortized over a period of years, such as three years.

In our comment letter to the Committee in response to its discussion paper on expected credit loss accounting rules over the longer term, we urged the Committee to maintain Basel III’s distinction between accounting “general provisions” and “specific provisions” even though IFRS 9 and CECL do not include these concepts.  We also urged the Committee to allow “general provisions” established under expected loss standards to be included in Additional Tier 1 capital, the second most desirable form of Basel III regulatory capital.

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