Basel Committee Seeks Input on Accord Revisions
WOCCU Coordinating Global Credit Union Movement Response
February 01, 2010
MADISON, Wis. — In response to the global financial crisis, the Basel Committee on Banking Supervision is looking to make several adjustments to its capital adequacy and liquidity requirements for financial institutions worldwide as part of its revisions to the Basel II Accord. The revised documents were released for public comment in December, and World Council of Credit Unions (WOCCU) is making sure the global credit union movement's voice is heard.
The new guidelines, adapted with guidance from the Group of 20 (G-20) nations in response to last year's global economic meltdown, recognize for the first time differences between large for-profit financial corporations and non-joint stock companies, which include mutuals, cooperatives and credit unions. Response by credit unions to these differences and other factors that favorably affect financial cooperatives is critical to ensure that those standards appear in the final guidelines, according to Dave Grace, WOCCU vice president of association services.
"This is the first time the Basel Committee has recognized that financial cooperatives are different," said Grace. "We want to make sure these and other standards that enable credit unions to better serve their members appear in the final version."
WOCCU in the past has submitted its ideas and suggestions for consideration by the Basel Committee. On April 5, 2009, Grace and Pete Crear, WOCCU president and CEO, traveled to Amsterdam to meet with Basel Committee Chairman Nout Wellink, president of The Netherlands Bank, to make the case that credit unions should not be penalized by tougher capital requirements than those faced by larger, riskier institutions that present systemic risk to the global financial system.
"We didn't want credit unions and financial cooperatives to pay an unfair price as part of the solution to a crisis they had no hand in making," Crear said. "Chairman Wellink was very receptive to our comments and assured us that he would bring our concerns forth to his fellow committee members."
As the result partially of that visit and WOCCU's work with the Basel Committee over the past decade, the current amendments to the Basel II Accord reflect a greater understanding of the different structure and nature of financial cooperatives. The reform package covers the following key areas of interest to credit unions:
- Raising the quality, consistency and transparency of the capital base. The new guidelines seek to ensure that financial institutions move to a higher capital standard that promotes long-term stability and sustainable growth, enabling the banking system to better absorb losses on existing banks and banks that have gone out of business. In terms of the quality of capital, the committee proposes that Tier 1 capital be defined as common shares and retained earnings and tailored accordingly for credit unions' structure. Innovative hybrid capital instruments will be phased out. Tier 2 capital instruments must be better aligned and Tier 3 capital instruments should be eliminated. The committee further proposes to enhance capital base transparency by requiring institutions to disclose capital elements in reported accounts.
- Reducing procyclicality and promoting countercyclical buffers. A countercyclical capital framework will contribute to a more stable banking system than a procyclical one, which will help to dampen rather than amplify economic and financial shocks. To this end, adequate capital buffers at individual institutions should be established. The committee also is promoting more forward-looking provisioning based on expected losses that captures actual losses more transparently and is less procyclical than the current incurred-loss provisioning model.
WOCCU has asked its member organizations worldwide for input on the current revisions to the Basel II Accord as outlined in the two consultative documents, and will aggregate responses to present to the Basel Committee. WOCCU member organizations wishing to comment on proposed revisions should submit responses by April 2 to Grace at email@example.com. WOCCU will be working with the Basel Committee throughout the year as it completes impact assessments and finalizes the standard by year end.
World Council of Credit Unions is the global trade association and development agency for credit unions. World Council promotes the sustainable development of credit unions and other financial cooperatives around the world to empower people through access to high quality and affordable financial services. World Council advocates on behalf of the global credit union system before international organizations and works with national governments to improve legislation and regulation. Its technical assistance programs introduce new tools and technologies to strengthen credit unions' financial performance and increase their outreach.
World Council has implemented 300+ technical assistance programs in 89 countries. Worldwide, 68,882 credit unions in 109 countries serve 235 million people. Learn more about World Council's impact around the world at www.woccu.org.