Demutualization De-Emphasized as a Resolution Tool for Financial Coops

Volume 7, Number 3
April 23, 2018

Demutualization De-Emphasized as a Resolution Tool for Financial Coops

The final version of the International Association of Deposit Insurers guidance on Resolution Issues for Financial Cooperatives includes significant changes from the proposal urged by World Council of Credit Unions (WOCCU) to help better preserve the financial cooperative model. 

Specifically, the final version of the Association’s guidance clarifies that demutualization of a financial cooperative as a resolution measure should be used only as a last resort, such as when a business combination with another financial cooperative is not possible.  Had the Association finalized its resolution guidance as originally proposed, demutualization would have been the primary resolution approach recommended for financial cooperatives.

The final version of the Association’s guidance also emphasizes purchase and assumption transactions with other financial cooperatives as a preferred resolution method when the financial cooperative to be acquired has passed the point of non-viability.

WOCCU Urges Basel Committee to Recognize the Low Risk of Domestic Government Exposures

WOCCU recently filed comments in response to the Basel Committee on Banking Supervision’s (Committee) discussion paper The Regulatory treatment of sovereign exposures urging the Committee to establish of a 0% credit risk-weight for domestic-currency central government exposures as well as for exposures to central-government-sponsored public sector entities.  A 0% risk-weight would treat credit exposures to domestic governments as effectively riskless and the 0% risk-weight is already used for assessing the credit risk of domestic sovereign exposure in many jurisdictions.

Our comments also opposed using a marginal risk-weight add-on to control for domestic sovereign exposure concentration risk, since most financial cooperatives’ rulebooks typically limit their investments to loans to members, investments in domestic government-guaranteed bank accounts and domestic government-guaranteed debt such as bonds.  Our comments urged the Committee to limit any marginal risk weight add-on rules to apply only to large concentrations of foreign sovereign exposures.

It is likely that the Committee will issue a proposal in the future concerning sovereign exposure credit risk after reviewing the comments it received in response to this discussion paper.

Proportionality in Stress Testing Urged by WOCCU

WOCCU in late March filed a comment letter urging the Basel Committee on Banking Supervision (Committee) to include the “principle of proportionality” in its stress testing rules in order to reduce compliance burdens on credit unions and other community-based financial cooperatives.  

The Committee’s Consultative Document: Stress Testing Principles, if finalized as proposed, would change the international rules for stress testing to be a principles-based approach that would  require stress testing practices to be “applied on a proportionate basis, depending on size, complexity and risk profile of the bank or banking sector for which the authority is responsible.” 

Our comments urged the Committee to finalize the guidance’s proportionality requirements as proposed in order to limit regulatory burdens on community-based financial institutions.

International Association of Deposit Insurers Urged to Include Credit Union Deposit Insurance Funds in Setting Ratios

WOCCU also recently filed a comment letter in response to the International Association of Deposit Insurers draft research paper Deposit Insurance Fund Target Ratios in order to provide the Association with regulatory information and data concerning credit union savings guarantee systems that were not included in the Association’s draft paper.  These included the National Credit Union Share Insurance Fund (NCUSIF) in the United States of America, the United Kingdoms’ Financial Services Compensation Scheme (FSCS), and several Canadian provincial deposit insurance funds.

Our comments argued that including these successful credit union deposit insurance funds in the final version of the Association’s research paper can help better inform the Association’s future work on deposit insurance fund target ratios. In addition, our comments argued that these funding structures strike an appropriate balance vis-à-vis the costs of levies versus maintaining readily available funds to pay for insurance losses.


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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