MADISON, Wis.–The Basel Committee has made several changes to its final rules in response to CU input, including removing language from one proposal that included a number of inaccurate claims related to credit unions.
As CUToday.info earlier reported here, the final version of the Basel Committee on Banking Supervision’s Guidance on the application of the Core Principles for Effective Banking Supervision to the regulation and supervision of institutions relevant to financial inclusion increases capital flexibility for credit unions and other mutuals, according to the World Council of Credit Unions.
“In addition, the final Basel Committee standard removes numerous, inaccurate claims about the supervision of credit unions and other mutuals that the World Council of Credit Unions strongly opposed in our March 31, 2016 comment letter to the Committee,” noted WOCCU VP and General Counsel Michael Edwards.
WOCCU noted that in terms of increased capital flexibility for credit unions and other mutuals, at World Council’s request the Committee stated expressly that “[n]ational regulators are encouraged to use their discretion to adjust their capital definitions” so that “[m]ember shares issued by mutual banks and cooperative” financial institutions with sufficient permanence and loss absorbability can qualify as “common equity Tier 1” capital. Common equity Tier 1 capital is the most desirable form of regulatory capital under Basel III and also includes retained earnings.
In addition, the final version of the standard at World Council’s urging removed five inaccurate claims about financial cooperative institutions and other mutuals that the Committee had included in its December 2015 proposal.
Specifically, WOCCU noted, the final standard:
- Removed inaccurate criticisms of cooperatives’ corporate governance.
- Removed language saying that cooperatives are subject to “excessive risk-taking” (when in reality credit unions are usually more risk-adverse than joint-stock banks).
- Removed language saying that undercapitalized cooperatives should not be allowed to add new members.
- Removed language saying that shares issued by cooperatives and mutuals are not typically eligible for inclusion in regulatory capital.
- Clarified that credit unions and other mutual banking institutions are depository institutions.
The “good news,” said Edwards, is that U.S.-based credit unions should not be affected by the final rules.
Separately, the final version of the Basel Committee’s TLAC [Total Loss Absorbing Capacity] Holdings standard, which was issued last week and which amends the Basel III capital accord, will have little or no impact on credit unions and other mutuals, WOCCU reported.
“As urged by World Council in our February 2016 comment letter, the final version of the standard only applies to Global-Systemically Important Banks (G-SIBs) and institutions subject to Basel III that invest more than 5% of their common equity in convertible bonds or other ‘Total Loss Absorbing Capacity’ (TLAC) instruments issued by G-SIBs,” said Edwards.
Credit unions and other mutuals subject to Basel III will therefore only be impacted by this new Basel standard if they invest an amount more than 5% of their “common equity Tier 1” capital (i.e. retained earnings and most types of perpetual capital shares) in convertible bonds or other TLAC instruments issued by the 30 G-SIBs, which is highly unlikely, WOCCU noted.