FATF Correspondent Banking Guidance

Volume 5, Number 5
December 21, 2016

FATF Correspondent Banking Guidance

The Financial Action Task Force (FATF) has issued the final version of its guidance on anti-money laundering/countering the financing of terrorism (AML/CFT) rules for Correspondent Banking ServicesWorld Council has long advocated for clearer correspondent banking AML/CFT rules in order to reduce correspondent banks “de-risking” their client bases by refusing to establish or maintain correspondent banking relationships with credit unions and other financial cooperatives. 

The new FATF guidance specifies correspondent banks’ full compliance responsibilities with respect to AML/CFT customer due diligence and monitoring of correspondent banking relationships.  The FATF guidance also establishes a formal information sharing protocol between institutions.  This guidance should reduce “de-risking” because the clearer rules and better information flows should reduce correspondent banks’ perceived compliance, enforcement, and reputational risks. 

World Council expects regional FATF-style bodies like the Caribbean Financial Action Task Force and national-level financial intelligence units such as Australia’s AUSTRAC, Canada’s FINTRAC, and the USA’s FinCEN to issue guidance based on this FATF standard in the near future.

Guide to Expected Loan Loss Accounting under IFRS 9

World Council has issued a guide to the IFRS 9 expected loan loss accounting standard for non-complex financial cooperatives. The seven-page guide summarizes the International Accounting Standards Board’s 242-page IFRS 9 Financial Instruments standard in quantitative terms.  IFRS 9 will take effect in January 2018 but can be phased-in early.

The World Council IFRS 9 guide includes use of the standard’s “practical expedient” allowing non-complex institutions to omit discounting the value of future cash flows to determine their present value.   Omitting rate of discount (i.e. the time value of money) significantly reduces IFRS 9 calculations’ compliance burdens.

European Commission Proposes More Basel III Exemptions for Credit Unions

In late November, the European Commission issued proposals to exempt more European credit unions from Basel III and to give credit unions’ deposits in European banks more favorable treatment than deposits made by other financial institutions. 

Specifically, the Commission proposed adding Basel III exemptions for credit unions in the Netherlands and Croatia, which would create credit union exemptions from Basel III in nearly all European Union Member States with credit unions.  The Commission also proposed a streamlined approach for granting additional, future Basel III exemptions for credit unions located in other EU Member States that do not currently have Basel III exemptions.

Regarding credit unions’ investments in bank term deposits, the Commission’s Basel III “Net Stable Funding Ratio” proposal would reduce by 50% the liquidity reserves that banks must hold against term deposits made by credit unions that have 1 to 6 months remaining maturity.  The lower reserve levels should help credit unions achieve better yields on their investments in bank term deposits.

European Parliament Credit Union Interest Group Discusses the Economics of Credit Union Regulation

The European Parliament Credit Union Interest Group met on November 16th at the European Parliament’s Espace Leopold in Brussels, Belgium to discuss how regulatory burdens affect the economics of credit union operations.  The Interest Group is composed of Members of the European Parliament (MEPs) who are credit union supporters. 

Keynote speakers at the event included Dr. Barry Quinn, Lecturer of Finance at Queen’s Management School, Queen’s University Belfast in Northern Ireland, and Michael Edwards, VP and General Counsel of World Council

Dr. Quinn presented the Interest Group with data on credit unions in the Republic of Ireland and the United Kingdom showing that Irish credit unions have recently moved from a position of increasing returns relative to scale, to a position of decreasing returns relative to scale, in large part because of increased regulatory burdens.  Mr. Edwards discussed how changes to European Union-level regulation can help the European economy by allowing credit unions to increase their lending to consumers and small and medium-enterprises in Member States such as the Netherlands.

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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