World Council Comments on Expected Credit Loss Guidance from the Basel Committee

Volume 4, Number 3
May 21, 2015

World Council Comments on Expected Credit Loss Guidance from the Basel Committee

World Council of Credit Unions (World Council) filed a comment letter  in response to the Basel Committee on Banking Supervision’s consultative document Guidance on accounting for expected credit losses on April 30thIf finalized as proposed, this Basel Committee guidance will likely require credit union supervisors in most jurisdictions to ensure that credit unions use a forward-looking “expected credit loss” approach to provisioning their allowances for loan losses.  Acceptable expected credit loss accounting standards include the International Accounting Standards Board’s International Financial Reporting Standard 9 and the Financial Accounting Standards Board’s Current Expected Credit Losses proposal under US generally accepted accounting principles (US GAAP).  Currently, credit unions and banks usually use “incurred loss” accounting standards for loan loss provisioning which establish reserves based on the losses that the institution has already experienced.  In contrast, expected credit loss approaches such as International Financial Reporting Standard 9 and Current Expected Credit Losses will require credit unions and banks to establish loan loss reserves based on what the institution projects its future losses on its loan book will be whether or not those losses have occurred already.

World Council’s comments strongly supported one provision of the Basel proposal which should help limit regulatory burdens on credit unions.  Specifically, we supported the proposal’s statement that regulatory burdens associated with loan loss rules should be proportional to a financial institution’s complexity and that less complex financial institutions, like most credit unions, should therefore be allowed to “adopt approaches commensurate with the size, nature, and complexity of their lending exposures.”

Our comments expressed concerns about other aspects of the proposal, however, including questioning whether it is necessary to require credit unions to move to an expected credit loss approach since credit unions have generally performed well under incurred loss standards. 

World Council’s comments also opposed a provision of the Basel proposal which, if finalized, would prohibit many financial institutions from using the accounting standards’ “practical expedients”—i.e. accounting shortcuts such as not being required to use rate of discount to establish the time value of money—which help limit these standards’ accounting regulatory burdens on smaller and less complex institutions.  

The Basel Committee is likely to issue the final version of this guidance paper in late 2015 or early 2016.  Although the Financial Accounting Standard Board has not yet set a compliance date for its soon-to-be-finalized Current Expected Credit Losses standard, compliance with the International Accounting Standards Board’s International Financial Reporting Standard 9 is scheduled to be mandatory for reporting periods beginning on or after January 1, 2018.

European Parliament Credit Union Interest Group Holds First Meeting

The European Parliament Credit Union Interest Group, a caucus for Members of the European Parliament (MEPs) who support credit unions, recently held its first formal meeting with European credit union leaders in Brussels to discuss how regulatory burden affects credit unions’ efforts to promote financial inclusion.  European Parliament Vice President Ryszard Czarnecki (Poland) and MEP Marian Harkin (Republic of Ireland) are the co-chairs of the European Parliament Credit Union Interest Group, and MEP Richard Howitt (United Kingdom) is the group's vice-chair. The European Network of Credit Unions helped launch the Interest Group at an event held in December 2014.

At the meeting MEPs and credit union leaders discussed how credit unions play an important role in promoting the financial inclusion of Europeans of modest means but are faced with expanding compliance burdens which take resources away from serving their members.  The credit union representatives shared specific examples with MEPs regarding their financial inclusion efforts and regulatory burden challenges in Estonia, Great Britain, Ireland, the Republic of Macedonia, Poland, and Romania.

MEPs at the meeting said that they shared credit unions’ concerns about the unintended consequences of regulation and excessive compliance burdens.  European Parliament Vice President Czarnecki urged credit unions to continue this dialogue in order to prevent overregulation of credit unions at the European level and to help make it easier for credit unions to provide their members with loans, savings and other financial services at reasonable rates.

Michael S. Edwards
VP and 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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