Basel Interest Rate Risk Final Guidance Responds to World Council’s Concerns

Volume 5, Number 2
May 23, 2016

Basel Interest Rate Risk Final Guidance Responds to World Council’s Concerns

The Basel Committee on Banking Supervision recently released the final version of its standard on Interest Rate Risk in the Banking Book, the Basel Committee’s formal guidance on monitoring, controlling and supervising interest rate risk.  The final Basel standard responds to World Council of Credit Union’s comments filed in September 2015 in three important respects that will limit regulatory burdens on credit unions.

First, the final version of the Basel interest rate risk standard expressly limits mandatory application of this guidance to “internationally active banks” as World Council strongly urged in our comment letter.   Credit unions rarely operate on a cross-border basis and therefore are not “internationally active” within the meaning of Basel rules.  Although national supervisors will have discretion over whether or not to apply this interest rate risk framework to non-internationally active institutions, applying these rules to credit unions would be a national policy decision that is not required by the Basel standard.

Second, consistently with our comments, the Basel Committee’s final interest rate risk guidance abandoned its proposal to impose the functional equivalent of a capital charge to control for interest rate risk.   Had this approach been finalized, credit unions’ capital requirements would have been increased with an add-on capital requirement for interest rate risk that the credit union would have needed to meet, in addition to its normal capital requirements, to be considered adequately capitalized. 

Instead of an add-on capital requirement, the Basel Committee retained the currently applicable “principles-based” approach for interest rate risk reserving.  Under this less prescriptive approach, depository institutions and supervisors will continue to establish interest rate risk reserves by following a series of high-level principles such as that interest rate risk “is an important risk for all banks that must be specifically identified, measured, monitored and controlled.”

Third, the Basel Committee at our urging stated expressly that “implementation of these principles should be commensurate with the bank’s nature, size and complexity as well as its structure, economic significance and general risk profile.”  This statement on proportional application should help limit this standard’s regulatory burdens on credit unions even further in jurisdictions where national supervisors choose to apply these rules to non-internationally active institutions.

World Council Comments on Correspondent Banking AML/CFT Standards at Financial Action Task Force Consultative Meeting

World Council made comments at a Financial Action Task Force (FATF) consultative meeting held April 18–20 in Vienna, Austria on how clearer FATF guidance can help credit unions maintain access to correspondent banking services.  The FATF, an inter-governmental body that sets anti-money laundering/countering the financing of terrorism (AML/CFT) rules at the global level, is likely to issue new guidance to clarify banks' AML/CFT responsibilities when they act as a correspondent for credit unions and other financial institutions.

Our comments at the FATF consultative meeting focused primarily on how AML/CFT rules should be clarified to ensure reasonable access to correspondent banking services for credit unions on fair terms.  We related challenges that smaller credit unions and credit unions with members who are Politically Exposed Persons (such as credit unions serving the staffs of government agencies or international organizations) have had over the past several years in terms of opening and maintaining correspondent accounts with banks. 

There seemed to be a consensus achieved at the meeting, at least in terms of the comments made by market participants, that clearer rules on information sharing between correspondent banks and respondent institutions would likely reduce banks’ compliance costs and make it easier for credit unions to establish and maintain correspondent bank accounts.  We believe that the FATF’s upcoming “Interpretive Note” on a risk-based approach to correspondent banking AML/CFT compliance will provide detailed guidance on how such an information-sharing framework will work in practice.  The FATF will likely publish the new correspondent banking Interpretive Note by October 2016.

Other issues discussed at the Task Force's consultative meeting included potential new guidance on the provision of banking services to nonprofit organizations and on cross-border information sharing about suspicious activities. 

World Council Opposes Inaccurate Claims About Credit Unions in Basel Committee Proposal

World Council has recently filed comments opposing many aspects of the Basel Committee on Banking Supervision’s consultative document Guidance on the application of the Core principles for effective banking supervision to the regulation and supervision of institutions relevant to financial inclusion. Among other things, our comments strongly opposed the Committee’s proposal to define credit unions and other mutual depository institutions as “nonbank” financial institutions even though the World Bank, the European Commission and US financial regulatory agencies define the term “nonbank” to apply only to institutions that are legally prohibited from accepting deposits. 

Our comments also opposed a statement that credit unions should be subject to higher capital levels than similarly sized banks, opposed inaccurate criticisms of credit union corporate governance, and opposed claims that credit unions are subject to “excessive risk-taking” on the basis that credit unions are generally much more risk-adverse than commercial banks.

World Council is working with our member associations around the world to correct the record by bringing these concerns directly to the attention of governments that are Basel Committee members, in addition to engaging the Basel Committee directly.  We also recently criticized this proposal in an op-ed piece published in CU Insight

Fortunately for the credit union movement, the Basel Committee’s anti-credit union statements in this proposal appear to be at least partially the result of bureaucratic maladroitness.  One contributing factor is that this proposal was written by the Basel Consultative Group, the “outreach arm” of the Committee that includes regulatory agencies that are not Basel Committee members, rather than by the more technically expert Basel Committee and/or its Secretariat.  As such, this proposal, while bearing the name of the Basel Committee, was not in fact developed by the Basel Committee itself.

A second factor appears to be that many aspects of this proposal were taken verbatim from the Basel Committee’s guidance paper Microfinance Activities and the Core Principles for Banking Supervision issued in 2010, even though that 2010 paper was limited in its scope to apply only to microfinance institutions in developing countries.  Our comments urged the Basel Committee to state expressly that its new guidance is similarly intended to apply only to microfinance institutions in the developing world, as was the case with the Microfinance Activities guidance from which much of this proposal was cut and pasted.

European Parliamentarian Credit Union Interest Group Discusses Digitalization of Credit Union Services

The European Parliament Credit Union Interest Group, a caucus for Members of the European Parliament (MEPs), met with credit union leaders at the European Parliament's Espace Léopold in late April to discuss how digital credit union services can provide European consumers with greater access to loans, savings and payments services at fair rates.

European Parliament Vice President Ryszard Czarnecki (Poland), MEP Marian Harkin (Republic of Ireland) and MEP Richard Howitt (United Kingdom), the co-chairs and vice-chair of the Interest Group, respectively, spoke to attendees about how increasing consumers' access to credit union services through electronic platforms like mobile banking apps presents a pivotal opportunity for increasing financial inclusion in Europe. Members of the Interest Group also discussed the challenges of digitalization, such as high technology-related costs, and how credit unions can overcome these hurdles using shared platforms like the Cornerstone Mutual Services credit union service organization being created by the Association of British Credit Unions, Ltd. as part of the United Kingdom's Credit Union Expansion Project.

In addition to the parliamentary speakers, Philippe Pellé, deputy head of the Retail Financial Services and Payments Unit of the European Commission's Directorate-General for Financial Stability, Financial Services and Capital Markets Union, made remarks concerning how recent developments in the European Union's regulatory environment on payments services is helping to pave the way for increased consumer access to digital financial services. World Council of Credit Unions also presented about credit union digitalization projects in Colombia and Mexico and how similar efforts in Europe can significantly increase the financial inclusion of unbanked individuals, especially in rural areas where it is often not cost effective for credit unions or banks to establish a branch office.

Representatives from the European Network of Credit Unions, the Association of British Credit Unions, Ltd., the Estonian Union of Credit CooperativesFULM Savings House of Macedonia, the Irish League of Credit Unions, the National Association of Co-operative Savings and Credit Unions of Poland, and the Ukrainian National Association of Savings and Credit Unions also participated in the European Parliament Credit Union Interest Group event.


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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