Advocacy Report: Basel Committee Authorizes Capital Add-Back Rules Urged by World Council to Reduce Expected Credit Loss Accounting Compliance Costs

Volume 6, Number 2
May 4, 2017

Basel Committee Authorizes Capital Add-Back Rules Urged by World Council to Reduce Expected Credit Loss Accounting Compliance Costs

The Basel Committee on Banking Supervision’s final “transitional rules” for regulatory capital include several key changes urged by World Council to reduce compliance costs related to the International Financial Reporting Standard (IFRS) 9 and US GAAP Current Expected Credit Losses (CECL) expected loss accounting rules.  Under the final Basel Committee standard, financial institutions will be allowed to add back the increased reserves required by IFRS 9 or CECL to the numerator of their regulatory capital ratios for up to five years.  The five-year add-back period, instead of the originally proposed three-year add-back period, is the result of World Council’s comments we filed with the Basel Committee in January 2017 and our meeting later that month with Basel Committee Secretary General William Coen

The final version of the standard also retains the Basel III distinction between “general provisions” and “specific provisions” for loan losses, as urged by World Council, even though IFRS 9 and CECL do not include this distinction.  Under Basel III, “general provisions” for loan losses are included in an institution’s Tier 2 capital.

Basel Committee Prudential Treatment of Problem Assets Incorporates World Council’s Input, Restricts Big Banks

The Basel Committee in mid-April issued the final version of its definition of non-performing loans and bonds.  As urged by World Council in our July 2016 comment letter, the Committee defines “default” as a loan or bond that has payments at least 90 days past due and the Committee also will permit institutions to assess the performance of consumers’ loans on a loan-by-loan basis (rather than treating all of a consumer’s loans as being in default when only one of a consumer’s loans is in default).  

In addition, this final standard places new restrictions on the ability of large banks following Basel III Internal Ratings-Based approaches to treat consumer loans as performing if they are more than 90 days past due.  Specifically, the revised standard treats large banks’ loans as defaulted if they are considered in default under IFRS 9, which establishes a rebuttable presumption of default once a loan’s payments are 90 days past due.  Previously, large banks following the Internal Ratings-Based approaches were allowed to treat consumer loans as performing until they were 180 days past due. 

Information Sharing, Customer Due Diligence and Correspondent Banking Anti-Money Laundering Rules

World Council filed a comment letter in April with the Financial Action Task Force regarding anti-money laundering/countering the financing of terrorism (AML/CFT) regulatory burdens related to information sharing, customer due diligence for unbanked persons, and correspondent banking.  We urged the Task Force to reduce compliance burdens on credit unions by clarifying when a financial institution may open an account for an unbanked person who does not have standard identification, such as a passport.  Our comments also urged the Task Force to permit increased AML/CFT information sharing between unaffiliated institutions to help resolve red flags related to international wire transfers and similar situations, and to ensure that the Task Force’s October 2016 Correspondent Banking Services guidance is phased-in globally.

World Council’s written comments reinforced and expanded the oral comments we made at the Task Force’s “Private Sector Consultative Meeting” held March 20-21, 2017 in Vienna, Austria.  We expect for the Task Force to issue new guidance on information sharing later this year, and the Task Force may also issue guidance on acceptable non-standard identification for unbanked persons in the near future.

FATCA Repeal Bills Introduced in US Congress

World Council and the Credit Union National Association sent letters to Senator Rand Paul (Republican-Kentucky) and Representative Mark Meadows (Republican-North Carolina) on April 24th supporting two bills recently introduced in the US Congress—S. 869 and H.R. 2054—that would repeal the Foreign Account Tax Compliance Act (FATCA).   FATCA requires many non-US credit unions to report information about the accounts of members who are non-residents to the US Internal Revenue Service or to local tax authorities, and requires credit unions in the United States to act as FATCA “withholding agents.”  Our letters supported repeal of FATCA in order to reduce regulatory burdens on credit unions around the world.

The House of Representatives Subcommittee on Government Operations also held a hearing on the unintended consequences of FATCA—such as Americans living overseas who were forced to renounce their US citizenship in order to maintain a local bank account—on April 26th, which World Council attended. Repeal of FATCA may be included in the tax reform legislation currently being developed by President Trump and Republicans in the US Congress that is expected to be introduced later this year.

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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