G20 Affirms Easy Monetary Policy and Financial Inclusion
Volume 4, Number 5
December 3, 2015
G20 Affirms Easy Monetary Policy and Financial Inclusion
The Group of 20 (G20) on December 1st published its Leaders' Communique from the G20 Summit held on November 15th-16th in Antalya, Turkey. Notably for credit unions, the G20 leaders reiterated their support for low interest rate monetary policy as well as for initiatives promoting the financial inclusion of unbanked and underbanked individuals.
Regarding monetary policy and global economic conditions, the G20 Leaders' Communique states:
"Global economic growth is uneven and continues to fall short of our expectations, despite the positive outlook in some major economies. Risks and uncertainties in financial markets remain, and geopolitical challenges are increasingly becoming a global concern. In addition, a shortfall in global demand and structural problems continue to weigh on actual and potential growth.
"We will continue to implement sound macroeconomic policies in a cooperative manner to achieve strong, sustainable and balanced growth. Our monetary authorities will continue to ensure price stability and support economic activity, consistent with their mandates. We reiterate our commitment to implement fiscal policies flexibly to take into account near-term economic conditions, so as to support growth and job creation, while putting debt as a share of GDP on a sustainable path . . . We will carefully calibrate and clearly communicate our actions, especially against the backdrop of major monetary and other policy decisions, to mitigate uncertainty, minimize negative spillovers and promote transparency . . . We remain committed to achieving our ambition to lift collective G20 GDP by an additional 2 percent by 2018 as announced in Brisbane last year."
On December 3rd the European Central Bank cut its "deposit rate" by 10 basis points to -0.30% and also announced an extension of the Bank's quantitative easing asset purchases until at least 2017. Also on December 3rd Federal Reserve Board Chairwoman Janet Yellen testified before the US Congress that the Fed's approach to interest rate increases is now "more likely to follow a gradual path" because of weakening economic conditions outside of the United States.
In addition, the G20 Leader's Communique reaffirmed the G20's support for "promoting financial inclusion by helping to open up access to payments, savings, credit and other services" as well as its support for the Global Partnership for Financial Inclusion's recently issued consultation on "Global Standard-Setting Bodies and Financial Inclusion." World Council of Credit Unions (World Council) will submit comments to the Global Partnership in response to this consultation that will highlight how excessive regulatory burdens make it more challenging for credit unions to serve the underserved.
World Council Comments on Basel Committee Interest Rate Risk Proposal
World Council urged the Basel Committee on Banking Supervision in a recent comment letter to maintain a principles-based approach to Interest Rate Risk and not implement an Interest Rate Risk mitigation regime that increases credit unions' minimum capital requirements. Interest Rate Risk can occur when a credit union holds positions of long-term fixed-rate loans or bonds with yields that are likely to be lower than the credit union's cost of funds once interest rates rise. Our comments also urged the Basel Committee to work with key central banks to ensure that interest rates rise in a controlled manner as a means to mitigate interest rate shocks on credit unions.
Specifically, our comments opposed the Committee's proposal to require institutions to increase their minimum capital levels to control for interest rate risk under "Pilar 1" (i.e. the regulatory capital framework) of the Basel III standard. The Committee proposed using a standardized equation to compute the amount of this add-on Interest Rate Risk capital requirement. We argued that the Pilar 1 approach is inflexible and would likely impose unjustified regulatory burdens on community financial institutions like credit unions because it is not as adaptable to different local economic conditions and different financial institution models.
We urged the Basel Committee to retain its current principles-based approach to controlling Interest Rate Risk under Basel III's "Pillar 2" (i.e. as part of the supervisory review process) based on an assessment of 12 high-level principles such as "[Interest Rate Risk] is an important risk for all banks that should be specifically identified, measured, monitored and controlled." Under the currently applicable Pillar 2 approach, credit unions can be required to establish reserves to control for Interest Rate Risk based on an assessment of the credit union's positions of assets and liabilities. Those Pillar 2 reserves, however, can typically be included in the numerator of the institution's Pillar 1 Total Risk-Based Capital ratio and do not increase the credit union's minimum capital requirements per se.
We also opposed the Basel Committee's proposal of a "hybrid" Pillar 1/Pillar 2 approach that, if adopted, would include an Interest Rate Risk add-on capital requirement similar to the Committee's proposed capital add-on under Pillar 1.
World Council Comments on UK Prudential Regulation Authority's Proposed Credit Union Rulebook
World Council pressed the United Kingdom's Bank of England-Prudential Regulation Authority (PRA) to rethink several aspects of its proposed "Reform of the Legacy Credit Unions Sourcebook" in a recent comment letter we filed with the agency. Our comments opposed several elements of the proposal that would be overly prescriptive and impose unreasonable regulatory burdens on British and Irish credit unions if finalized as proposed.
Specifically, we argued that the PRA should not finalize its proposed minimum leverage ratio of 10% capital to total assets for credit unions with more than GBP 10 million in assets or more than 10,000 members. We suggested that the agency instead create a Prompt Corrective Action regime where a credit union would be considered "adequately capitalised" if it had a leverage ratio of 5% or 6%.
We also strongly opposed the PRA's proposals to prohibit credit unions from accepting uninsured deposits, to cap the maximum permissible amount of a loan made by a credit union to no more than GBP 500,000 regardless of the credit union's asset size or capital position, and to require credit unions to meet a series of financial ratios in order to be allowed to engage in several lines of business, including payments services and mortgage lending, which are considered de rigueur for credit unions in many parts of the world.
European Parliament Credit Union Interest Group Holds International Credit Union Day Event
The European Parliament Credit Union Interest Group held its second formal meeting at the European Parliament's Espace Leopold in Brussels, Belgium, on International Credit Union Day. The interest group's membership includes fifteen Members of the European Parliament (MEPs) from Austria, Finland, the Republic of Ireland, Luxembourg, Poland and the United Kingdom, who are also members of the European Parliament's influential Economic and Monetary Affairs Committee.
The interest group's co-chairs, European Parliament Vice President Ryszard Czarnecki (Poland) and MEP Marian Harkin (Republic of Ireland), and its vice-chair, MEP Richard Howitt (United Kingdom), led a roundtable discussion with members of the European Network of Credit Unions regarding how European Union policy could help limit regulatory burdens on credit unions and make it easier to start credit unions in Member's States where they do not currently exist.
Also on International Credit Union Day, European Network of Credit Unions representatives spoke at a public hearing held by the European Banking Authority at its offices on Canary Wharf in London, England concerning the best ways to limit regulatory burdens on European credit unions associated with the Basel III Net Stable Funding Ratio.
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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