EU Revises Basel III Liquidity Coverage Ratio to help CU's

Volume 3, Number 4
October 14, 2014

EU Revises Basel III Liquidity Coverage Ratio to Help Credit Unions

The European Union (EU) has revised Europe’s version of the Basel III Liquidity Coverage Ratio (LCR) rules to grant relief to credit unions that invest in bank deposits. 

Early adoption of Basel III liquidity rules in the Republic of Ireland beginning in 2013 required Irish banks to assume that, in a crisis, credit unions would withdraw 100% of their funds from the bank, even though credit unions in Ireland and elsewhere generally increase their bank deposits during trying economic times in a flight to safety.   The original LCR rules also required banks holding deposits made by credit unions to establish additional reserves of “high-quality liquid assets” to control for the assumed high deposit outflows.  These reserve requirements led Irish banks to cite the increased cost of funds related to deposits made by credit unions as a reason for reducing the interest that they would pay on credit unions’ term deposits by an average of 1% or more annual interest.  Other EU Member States would likely have followed Ireland’s approach in the near future without clarification on this issue from the EU.

The European Credit Union Network (ENCU) has engaged both EU authorities and the Basel Committee on Banking Supervision on this issue since early 2013, including filing comment letters with the European Commission and the European Banking Authority as well as the Basel Committee.  World Council of Credit Unions also engaged the Basel Committee on this issue in comment letters on the global version of the LCR and the medium-term Net Stable Funding Ratio (NSFR) liquidity metric (which the Basel Committee and EU are still revising).  These advocacy efforts have now come to fruition with the EU’s revisions to the LCR that reduce greatly the percentage of credit unions’ short-term bank deposits (i.e. those with less than 30 days remaining duration) the rule projects would be withdrawn in a crisis. 

Specifically, Article 28 of the European Commission’s “Delegated Regulation” on the LCR released October 10th puts short-term bank deposits made by credit unions in a 20% outflow category with respect to insured deposits and a 40% outflow category with respect to uninsured deposits.  The new rules place bank deposits made by credit unions in the same category as bank deposits made by non-financial businesses, central banks, and government agencies, and is significantly better than the originally applicable 100% outflow rate. 

These new, lower LCR outflow rates should reduce the reserves European banks hold against short-term deposits made by credit unions by between 60% and 80%.  The lower reserve requirements will in turn reduce significantly the banks’ cost of funds for holding these deposits, and allow the banks to pay credit unions better yields.

Although the Basel Committee and the EU have not yet finished the final standard for the NSFR—the Basel III liquidity metric for term deposits and similar bank funding of 1 to 12 months remaining duration—the EU’s concessions for credit unions in its LCR standard make us optimistic that the EU will also grant similar relief to credit unions in the final European version of the NSFR.

World Council Comments on Basel "Weak Banks" Proposal

World Council recently filed a comment letter in response to the Basel Committee for Banking Supervision’s proposed Supervisory guidelines for identifying and dealing with weak banks.  We strongly opposed several aspects of the proposal that we believed could be used to discriminate against the cooperative depository institution model or would impose excessive regulatory burdens on credit unions.

The proposed Basel guidance is intended to offer “practical guidelines in the areas of problem identification, corrective action, resolution techniques and exit strategies” by identifying, strengthening and, if necessary, resolving weak financial institutions.

World Council strongly opposed the guidance’s suggested corrective actions of “requir[ing] changes in the legal structure of the banking group” and “forced restructuring” because, without clarification, these statements could be used to require mandatory conversion of weaker credit unions and similar mutual institutions to joint-stock companies.  Mandatory conversion of credit unions to joint-stock companies has already been under consideration in several Eastern European countries, as well as in Italy with respect to weaker Italian cooperative banks.  We argued that credit unions performed significantly better than joint-stock banks during the recent global financial crisis, and also that an International Monetary Fund analysis rejected demutualization of Italian cooperative banks as a viable solution for strengthening those institutions.

World Council also strongly opposed proposed language that would require all financial institutions, regardless of size or complexity, to be subject to the same regulatory and supervisory framework including risk-based capital requirements. We urged the Basel Committee to clarify the guidance to affirm that the “proportionality concept” (i.e. that regulatory standards should be proportionate to an institution’s size and complexity) set forth in the Basel Core principles for effective banking supervision and other Basel Committee issuances remains in effect.

In addition, World Council urged the Basel Committee to state in the guidance that supervisory discretion by regulatory agencies and examiners must be exercised consistently with the rule-of-law principles, and that credit union capital injections should not be subject to taxation.

Michael S. Edwards
VP and Chief 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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