Basel III Slashes Capital Requirements for Most Mortgages, Operational Risk

Volume 6, Number 9
December 12, 2018

Basel III Slashes Capital Requirements for Most Mortgages, Operational Risk

 The Basel Committee on Banking Supervision on December 7th issued the final version of Basel III with significant regulatory capital reductions for community-based financial cooperatives in the areas of residential mortgage lending and operational risk.  The final version of Basel III also preserves favorable treatment for non-mortgage loans to consumers and small businesses, but increases large banks’ capital requirements.  

 “Credit unions, mutual banks and building societies around the world should save billions of dollars under these new Basel III reserve requirements, which respond to years of lobbying by World Council of Credit Union’s (WOCCU) for regulatory relief,” said WOCCU Vice President and General Counsel Michael Edwards.  ”The Basel Committee has also responded to our advocacy by making large banks subject to minimum capital requirements that are more in-line with the Basel capital rules applicable to community-based institutions, which will help level the regulatory playing field.”

 WOCCU’s detailed summary of the final version of Basel III is available here.  The key points of the final Basel III standard for community-based financial cooperatives include:

  • The 75 percent of face value “regulatory retail” risk-weight for most non-mortgage loans to consumers and small businesses is preserved.  This category includes credit cards and other unsecured loans to consumers, consumer auto loans and leases, and business loans to small and medium-enterprises;
  • Operational risk reserves for virtually all community-based financial cooperatives will be reduced by roughly 20 percent compared to Basel II.  Larger institutions’ operational risk reserves will typically be higher than under Basel II;
  • Residential mortgage-loan risk weights are reduced by between 5 and 15 percentage points—translating to a capital reduction of between roughly 14 percent and 43 percent per loan—for residential mortgages with at least 20 percent equity or which have mortgage insurance or a guarantee.  These final risk weights are significantly lower than Basel II’s requirements as well as lower than the Committee’s proposal, which would have only reduced mortgage capital requirements for mortgages with at least 40 percent equity;
  • For mortgage insurance or guarantees, the risk weighting for the guaranteed amount can be as low as 0 percent if the guarantor is a government-sponsored enterprise, or as low as 20 percent in the case of private mortgage insurance;
  • Mortgages for second homes or investment properties are treated as owner-occupied residential mortgages for regulatory purposes unless more than 50 percent of the funds needed to pay the mortgage come from rental income;
  • For second-home or investment-property mortgages that are materially dependent on rental income, the final risk weightings are usually 30 to 45 percent of face value so long as the loan has at least 20 percent equity.  This is a significant concession from the Basel Committee’s proposed 70 to 120 percent risk-weight for most second-home or investment-property mortgages;
  • Large banks will be subject to a new “capital floor” that will not allow them to reduce their capital requirement to less than 72.5 percent of what their capital requirements would be under the Basel III standardized approach.  Basel II had no capital floor and World Council advocated strongly for the Committee to establish one for big banks;
  • Global Systemically Important Banks will have a higher leverage ratio requirement than other institutions; and
  • The compliance dates for the revised standardized approaches to credit risk and operational risk are delayed from January 2019 to January 2022.


WOCCU Urges Changes to International Association of Deposit Insurers Guidance on Resolution of Financial Cooperatives

World Council of Credit Unions (WOCCU) filed comments in November with the International Association of Deposit Insurers urging significant changes to the Association’s draft paper on Resolution Issues for Financial Cooperatives: Overview of Distinctive Features and Current Resolution Tools.  

“Demutualization should be a last resort for resolving financial cooperatives,” said WOCCU Vice President and General Counsel Michael Edwards. “Maintaining the availability of cooperative financial services to ordinary physical persons and small and medium-enterprises is important for promoting financial inclusion in all types of communities, especially rural districts and poor urban areas that are underserved by commercial banks because of a perceived lack of profitability."

WOCCU urged the Association to reduce regulatory burdens on financial cooperatives by making the following changes in the final version of its standard: 

  1. Demutualization should be used only when a business combination with another financial cooperative is not possible;
  2. Mergers or purchase and assumption transactions with another financial cooperative should be supervisors’ preferred resolution method;
  3. The Association’s paper should include recent Basel Committee on Banking Supervision, Canadian Office the Superintendent of Financial Institutions, and European Union capital rules for financial cooperatives which have increased cooperatives’ ability to recapitalize; and
  4. Supervisory tools available before the point of non-viability, such as capital restoration plans and similar prompt corrective action measures, should be emphasized.

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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