Not a Burden? Really?
Volume 11, Number 8
August 25, 2021
Advocacy News You Can Use
“Basel III is not a burden” is what Carolyn Rogers, Secretary General of the Basel Committee on Banking Supervision, said in the ECB Supervision Newsletter recently. When I read this quote, my stomach churned, mainly, due to the indifference that an international standard setter could have towards small, less complex, community-based financial institutions such as credit unions. Granted, the point she was trying to make is that the standard is designed to allow healthy, well-capitalized financial institutions to serve the system even during severe stress and thus, the Basel III framework is indeed necessary and not a burden. But it really misses out on the broader effect that the adoption of regulations designed for large, internationally-active, globally-systemic institutions can have on credit unions. The complexity alone of Basel III is a problem and, frankly, makes it difficult for many regulators to understand, let alone banks and credit unions.
This lack of broader appreciation of the effects is precisely why World Council this week called for the Basel Committee to provide clear direction to national level-regulators to be flexible when withdrawing many of the relief measures adopted during the COVID-19 pandemic, so that they will not create unnecessary institutional stress on credit unions. We further called for an additional one-year delay in the implementation of Basel III. It’s time for the Basel Committee to make the framework work for all institutions.
World Council Calls for Pandexit Flexibility from Basel Committee
WOCCU called for flexibility from the Basel Committee on Banking Supervision as it considers the withdrawal of relief measures adopted during the COVID-19 pandemic.
“It is important to allow national-level regulators a great amount of flexibility to adjust to local conditions and economies when removing COVID-19 relief measures for credit unions. Otherwise, unnecessary shocks to their balance sheets could hinder their ability to serve communities trying to recover from the pandemic,” said WOCCU Senior Vice President of Advocacy and General Counsel Andrew Price.
Specifically, WOCCU urged the following actions by the Basel Committee that will benefit credit unions and set the framework for a measured and orderly withdrawal of relief measures:
- Provide clear direction to national-level supervisors that a measured and orderly withdrawal is appropriate, without establishing any firm timelines or deadlines.
- Allow national-level supervisors with ample discretion to adjust the withdrawal of relief based on local conditions and localized circumstances.
- Provide direction to national-level supervisors urging patience and leniency, erring on the side of leaving a relief measure in place versus the risk of harm that may result from an early withdrawal of a relief measure.
- Allow supervisors to work with financial institutions on reasonable capital restoration plans that are appropriate for each institution while holding them harmless from any regulatory violation, as long as the plan is being executed in good faith, and absent any safety and soundness concern.
Additionally, World Council, in conjunction with FEDEAC, our direct member credit union association in Costa Rica, has issued “Financial Strategy to Mitigate the Impact of the COVID-19 Crisis, a COVID-19 Global Response Committee Technical Paper,” which provides additional insight into the specific areas of concern for credit unions during the COVID-19 recovery period. This is a beneficial tool for credit unions that is comprised of recommendations for strategic methods to manage the impact of the dual social and economic crises generated by the COVID-19 pandemic
A full copy of World Council's letter can be viewed here.
Why this matters to your credit union: Flexibility for national-level regulators will help minimize any negative effects on credit union balance sheets from the withdrawal of relief measures. These all need to occur in an orderly and thoughtful manner, and adjusted for local conditions.
Basel III Not Viewed as a "Burden" by Basel Committee
"I don't see Basel III as a burden - I see a compelling case to get it done," said Carolyn Rogers, Secretary General of the Basel Committee on Banking Supervision, in the ECB Supervision Newsletter. This quote came as a part of her comments responding to the question of whether the implementation of Basel III reforms in the aftermath of the pandemic was creating an extra burden on banks (and other financial institutions).
Rogers noted that a healthy, well-capitalized banking system can support an economy, even under severe stress. This is in contrast to what was learned during the great financial crisis, which was that weak banks not only create a financial crisis, but they can also amplify the effects of that crisis on the real economy.
WOCCU's concern with the statement, however, continues to be the indifference by the Basel Committee to smaller, less-complex, community-based financial institutions such as credit unions, for whom Basel III reforms have clearly increased complexity, regulatory burden and, in some instances, the ability to serve rural or underserved markets.
A complete copy of the interview can be viewed here.
Why this matters to your credit union: The lack of appreciation for the effect of international standards on smaller financial institutions is a concern and means that regulatory relief will be hard fought. It is worth noting the acknowledgement in the interview that complexity is an ongoing concern of the Basel Committee.
Basel Committee and World Bank Publish Survey on Proportionality
On July 30, 2021, the Basel Committee on Banking Supervision and the World Bank published a global survey of 90 authorities including bank supervisors and regulators entitled, Proportionality in bank regulation and supervision - a joint global survey. Although the Basel Committee acknowledges that proportionality encourages many benefits such as banking stability, reduction of compliance costs and regulatory burden, and utilization of “scarce supervisory resources,” the Committee recognizes challenges related to the approach and implementation of proportionality such as “how to define the tiering criteria, how to maintain a level playing field, how to avoid opportunities for regulatory arbitrage,” and “how to ensure financial positions are still comparable across banks, and how to achieve net reduction in compliance costs and stress on supervisory resources and constraints.”
The Basel Committee touts that proportionality is ingrained in their work, specifically in the Committee’s Core Principles for Effective Banking Supervision (BCPs). World Council fully supports the Basel Committee and World Bank’s commitment to improving proportionality approaches. However, the related concerns and concepts within proportionality should apply widely to all relevant financial institutions, such as credit unions and not just to banks.
“We applaud the Basel Committee’s focus on understanding proportionality. However, we note the absence of responses that indicate a connection between proportionality and financial inclusion, and providing access to responsible financial products. This should also be a significant driver for implementing proportionality by all supervisory authorities beyond the focus on supervisory resources,” said World Council Senior. Vice President of Advocacy Andrew Price.
“The key takeaways from the analysis of survey responses are:
- Proportionate implementation is practiced widely, across geographic regions and income groups. The use of proportionality is growing, as judged by respondents reporting future plans for proportionality. This is a work-in-progress but is also challenging for several jurisdictions.
- Importantly, proportionality is acknowledged by respondents as promoting banking stability, reducing unnecessary regulatory burden and compliance costs, and making effective use of scarce supervisory resources. Consistent with this, a significant proportion of respondents (67%) are planning to implement or revise their proportionate approaches. Respondents have also expressed a clear preference for implementing a limited set of Committee standards.
- However, challenges remain for jurisdictions that have adopted or are considering adopting proportionality. These challenges are during the design of proportionate approach (eg how to define the tiering criteria, how to maintain a level playing field and how to avoid opportunities for regulatory arbitrage) and after proportionality is implemented (eg how to ensure financial positions are still comparable across banks and how to achieve net reduction in compliance costs and stress on supervisory resources and constraints).
- Implementation is motivated by factors other than risk profile or systemic relevance in some cases. For example, full or conservative set are implemented by jurisdictions seeking to obtain or retain correspondent banking relationships, meet the expectation of host jurisdiction supervisors or of rating agencies, regional pressure and peer pressure.”
More information on the survey can be found here.
Why this matters to your credit union: It is encouraging that the Basel Committee continues to look at the implementation of proportionality. However, it is discouraging that regulators identified “saving resources” as the primary motivator for proportional tailoring and not establishing appropriate frameworks that allow financial institutions to serve vulnerable or underserved populations.
Andrew T. Price, Esq.