BASEL, Switzerland–The Basel Committee on Banking Supervision has released the final version of its standard on Interest Rate Risk in the Banking Book, which is its formal guidance on monitoring, controlling and supervising interest rate risk, and it includes response to comment letters filed by the World Council of Credit Unions in 2015.
The changes, WOCCU said, can be seen 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,” said Michael S. Edwards, general counsel with WOCCU. “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, said Edwards, 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,” said Edwards.
Edwards noted that 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,” according to the Basel Committee.
The third limit that the Basel Committee has put in place at the urging of WOCCU, according to Edwards, is seen in the statement 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,” said Edwards.