Volume 12, Number 7
July 27, 2022
Advocacy News You Can Use
The Basel Committee’s recent release of its High-level Considerations on Proportionality is cause to celebrate for credit unions. While the Basel III Framework always had proportionality built into the standard, we have often observed that national-level regulators were hesitant to apply proportionality either for fear of the perception of watering down an international standard, or because the effort to properly tailor the regulations was more work than the regulator wanted to take on. This guidance makes it abundantly clear that the Basel III Framework is intended for large, internationally active banks.
The guidance goes even further by making it clear that for simpler, less complex financial institutions such as credit unions that generally do not operate on a cross-border basis, applying simpler approaches is entirely appropriate, or using an earlier or modified form of the Basel III framework may also be appropriate.
This leaves little excuse for national-level regulators not to tailor regulations for credit unions and should lead to regulatory relief. Many jurisdictions apply substantial elements of the framework that are not appropriate for the credit union model. Make no mistake, there is still work to be done at the national level on the implementation of the guidance, but this release is cause to celebrate. Credit unions need regulations that allow their member-owned cooperative model to operate, and this sets the stage.
Basel Committee Issues Needed WOCCU-Advocated Guidance on Proportionality
The Basel Committee on Banking Supervision (Basel Committee) has issued guidance encouraging national-level regulators to consider tailoring its standards for less complex financial institutions such as credit unions—a position long-advocated for by World Council of Credit Unions that will benefit financial cooperatives and their members worldwide.
In its High-level Considerations on Proportionality publication, released July 7, the Basel Committee stated this most recent guidance “aims to provide practical support to supervisory authorities seeking to implement proportionality in their domestic regulatory and supervisory frameworks.”
WOCCU has long advocated for the Basel Committee to work with national-level supervisors on the implementation of its Basel III standards, so they can be tailored appropriately for the size, risk and complexity of credit unions, allowing them to better serve their members.
More recently, WOCCU urged the G20 to give direction to international standard setting bodies to work with national-level regulators on proportionality for the purposes of advancing financial inclusion. With the release of its new guidance, the Basel Committee took an important step in creating a framework that will enhance the ability of credit unions to promote financial inclusion.
The document specifically states:
"Depending on local circumstances, it might be appropriate to tailor regulation for non-internationally active banks. This includes potentially applying the Basel Framework in its current form (ie Basel III), or earlier or modified forms, for jurisdictions that have simpler banking systems, implemented in a way that is consistent with the underlying objective of the international standard. Such proportionate approaches preserve financial stability through bank safety and soundness. For some banks and banking systems, this might be achieved with rules that are even simpler than the Basel Framework while remaining broadly aligned with the international standards."
This represents clear guidance to national-level supervisors that they can tailor the Basel Framework in a manner that contemplates the lower risk, less complex credit union model.
“We have been urging the Basel Committee for years to provide further guidance and direction to supervisors on how to implement the Basel Framework for credit unions. This guidance is welcomed and will ultimately help credit unions achieve greater financial inclusion worldwide,” said Andrew Price, Senior Vice President of Advocacy and General Counsel, World Council of Credit Unions.
The document further puts forth seven high-level considerations, as well as more specific recommendations relating to various elements of the Basel Framework, including:
- definition of capital.
- calculation of RWA.
- leverage ratio.
- liquidity requirements.
- large exposures.
- pillar 2.
- disclosure requirements.
- corporate governance.
- risk management.
Many national-level policymakers continue to feel obligated to apply Basel III and other Basel Committee standards to non-complex, purely domestic deposit-taking institutions, even though that standard is intended for large, internationally active banks. This guidance takes important steps to clearly outline factors justifying the application of less complex regulatory approaches to less complex institutions.
A copy of the guidance can be viewed here.
Why this matters to your credit union: This release provides clear direction to national-level regulators to tailor the Basel III framework for credit unions. It should result in regulatory relief for many systems throughout the world.
European Parliament and Council Reach Provisional Agreement on MiCA
On June 30, 2022, the European Parliament and the European Council Presidency reached a provisional agreement on the markets in crypto-assets (MiCA) proposal. The proposal encompasses unbacked crypto-asset issuers, stablecoins, trading venues and crypto-asset wallets. Although national-level regulators have already begun to implement crypto-asset legislation, this marks the first time that crypto-assets, crypto-assets issuers and crypto-asset service providers are all under a regulatory framework at the EU level.
The goal of MiCA is to protect consumers from investment risks such as fraud, market manipulation and insider dealing, as well as hold crypto-asset service providers liable for loss. MiCA also requires relevant crypto-asset players to “declare information on their environmental and climate footprint”, and as a follow up, in two years “the European Commission will have to provide a report on the environmental impact of crypto-assets and the introduction of mandatory minimum sustainability standards for consensus mechanisms, including the proof-of-work.” MiCA further requires a public register of non-compliant crypto-asset service providers to be maintained by the European Banking Authority (EBA). Listed providers with parent companies in high-risk areas for money laundering, as well non-cooperative jurisdictions for tax purposes, are subject to additional checks within the EU AML framework. MiCA also has additional requirements related to stablecoins, non-fungible tokens (NFTs), and crypto-asset service providers’ (CASPs) authorizations.
The Council and Parliament will need to approve the provisional agreement before in enters a formal adoption procedure. More information on the provisional agreement on MiCA is available here.
Why this matters to your credit union: This is a major step forward in the regulation of digital assets and cryptocurrency that is likely to have influence on future regulations around the world. Credit unions should pay attention to learn about potential impacts to their own operations for the emerging technologies.
EU Reinforces Rules on Crypto Asset Transfers to Reduce the Use of Cryptocurrencies for Crime
On June 29, 2022, the European Council Presidency and the European Parliament reached a provisional agreement and extended the of the scope of a proposal by way of the "travel rule," which updates transfer of fund rules to include transfer of crypto assets. The rule aims to “…ensure financial transparency on exchanges in crypto-assets and will provide the EU with a solid and proportional framework that complies with the most demanding international standards on the exchange of crypto-assets, in particular recommendations 15 and 16 of the Financial Action Task Force (FATF), the global money laundering and terrorist financing watchdog.”
The proposal hopes to hold service providers of crypto assets responsible for collecting and providing access to information pertaining to the originators and beneficiaries of those crypto asset transfers in an effort to expand “traceability” as a means to identify and block suspicious transactions, specifically related ML/TF risks. Under the agreement, the GDPR’s data protection rules will continue to apply to the transfer of crypto assets as well as existing sanctions that apply to all natural and legal persons. The provision must undergo confirmation by both the Council and the Parliament before it can be formally adopted.
More information on the provisional agreement is available here.
Why this matters to your credit union: Emerging technology such as crypto assets are of great concern for regulators due to its potential use for evading anti-money laundering/terrorist financing controls and safeguards. Implementation of the FATF standards in this area will have an effect on the operations of most financial institutions.
Andrew T. Price, Esq.