WASHINGTON—The World Council of Credit Unions has filed a comment letter with the Basel Committee on Banking Supervision’s regarding the discussion paper “The Regulatory Treatment of Sovereign Exposures.”
This discussion paper is derived from a report from by a high-level Task Force on Sovereign Exposures set up by the Committee to review the regulatory treatment of sovereign exposures and recommend potential policy options, explained Michael Edwards, Vice President for Advocacy and General Counsel of World Council of Credit Unions.
“Our comment said that U.S. government debt should be treated as risk-free for capital purposes, which is the current state of affairs—although they are doing this proposal to potentially change that. We oppose changing that part,” said Edwards on a press call. “We also said the NCUA guaranteed instruments, like the NGN notes and National Credit Union Share Insurance Fund, should be treated as exposures to the U.S. government because they are backed by the full faith and credit of the U.S. government.”
In its letter, WOCCU specifically urged the following:
- The establishment of a 0% risk-weight for domestic-currency central government exposures, including for exposures to central-government public sector entities (PSEs) that meet the Committee’s “support criteria,” as a general policy matter, or alternatively, to continue to permit 0% risk-weightings for domestic sovereign exposures as a national discretion. WOCCU notes that existing Basel III reserve requirements already adequately control for the risks of a domestic sovereign default in a proportional manner
- Opposition to the imposition of a marginal risk weight add-on approach for domestic sovereign exposures and urged the Committee to limit any marginal risk weight add-on rules to apply only to foreign sovereign exposures. “Because credit unions and other community-based depository institutions are usually subject to portfolio shaping rules that limit their permissible investments to loans, deposits in other depository institutions, and debt instruments guaranteed by a domestic sovereign, additional risk weights are not warranted,” wrote WOCCU
- Opposition to requiring credit unions to stress test the creditworthiness of their exposures to domestic sovereigns
- Consideration of dividing sovereign exposures into three or more classes that are not reliant on credit ratings per se, such as: (a) domestic sovereign exposures (which present lower credit risks than foreign sovereign exposures); (b) “investment grade” foreign sovereign exposures; and (c) “non-investment grade” foreign sovereign exposures