Basel Committee Finalizes WOCCU-Recommended Reg Burden Reductions
Volume 7, Number 4
June 28, 2018
Basel Committee Finalizes Standards on Short-Term Securitisations with Changes Urged by World Council
The Basel Committee on Banking Supervision and the International Organization of Securities Commissions (IOSCO) recently finalized two standards on the regulatory requirements and capital treatment for short-term securitisations, such as asset-backed commercial paper, with changes urged by World Council of Credit Unions to limit regulatory burdens on community-based financial institutions.
Key changes in the final standards that were urged by World Council in our comment letters (which are available here and here) included reducing an institution’s minimum performance history to qualify for short-term securitisation eligibly from five years to three years and clarifying that credit and liquidity support to an asset-backed commercial paper structure can be performed by more than one entity. Also at World Council’s urging, the Basel Committee and IOSCO clarified that equipment leases and auto loan and lease securitisations can be used as collateral under the short-term securitisations framework.
Key European Parliament Committee Removes Credit Union Basel III-Exemption Review Clause from Draft Capital Requirements Directive
On June 20th, the European Parliament’s Committee on Economic and Monetary Affairs (ECON) removed a provision from pending European Union (EU) legislation that would have required the European Commission to review credit unions’ exemptions from the EU’s version of Basel III every five years and recommend whether or not the exemptions should be abolished. The European Network of Credit Unions has advocated for the removal of this exemption review clause from the draft directive since its proposal by the Commission in November 2016.
Currently, credit unions in most EU Member States are exempt from the EU’s Basel III capital requirements and these exemptions allow Member States to establish non-Basel-III, national-level credit union rulebooks without any periodic reviews. The ECON Committee’s removal of the exemption review clause from the draft directive makes it all but certain that it will not be included in the Parliament’s final draft of the law.
World Council Supports Basel Committee’s “Simplified Alternative” Market Risk Reserves Proposal But Urges Retention of Basel II Reserve Levels
World Council on June 20th filed comments supporting most aspects of the Basel Committee on Banking Supervision’s revised and updated proposal to establish a “Simplified Alternative” to Basel III’s standardised approach to market risk capital requirements, which would apply to less complex banking institutions. As proposed, the revised Simplified Approach would be a reworking of the Basel II rules for market risk reserves that would likely be less burdensome than the Basel III standardised approach, but would add multipliers that would generally increase market risk reserves by at least 50 percent over Basel II.
As urged by World Council’s September 2017 comments in response to the Committee’s original Simplified Approach proposal—which only institutions with less than EUR 1 billion in total assets would have been allowed to use—the Committee’s revised and updated Simplified Approach proposal does not include any asset-size or trading-book-size limitations and could likely be used by any community-based depository institution. Our comments strongly supported those aspects of the updated proposal.
Our comments argued, however, that the Committee should retain the Basel II market risk reserve levels under the Simplified Approach without adding multipliers because increased capital costs could negate the regulatory burden reduction benefits of the Simplified Approach. We also argued that Basel II market risk reserves have proven to be safe and sound for community-based mutual depository institutions.
World Council Urges the Financial Action Task Force to Promote Increased Private-Sector Input During Anti-Money Laundering Evaluations, Continue Efforts to Reduce “De-Risking”
World Council urged the Financial Action Task Force during a recent Private Sector Consultative Forum held at the United Nations Office on Drugs and Crime in Vienna to increase engagement with the private sector during evaluations of national anti-money laundering/countering the financing of terrorism (AML/CFT) regulations and to continue efforts to reduce correspondent banks “de-risking” their client bases.
The Task Force, which is based in Paris, France, is the global standard setting body for AML/CFT rules and conducts periodic “mutual evaluations” of national-level AML/CFT rules. The Task Force’s mutual evaluation of the United States of America’s Bank Secrecy Act regulations and guidance is expected to begin this summer. Our comments urged the Task Force to promote increased engagement with the private sector during the mutual evaluation process in order to help reduce regulatory burdens on credit unions and other community-based mutual depository institutions.
World Council also urged the Task Force to continue its efforts to reduce “de-risking” in the financial system, which occurs when correspondent banks cease to do business with classes of institutions because of perceived AML/CFT compliance, enforcement, and reputational risks.
World Council Meets with Basel Committee on Basel III Leverage Ratio and Interest Rate Derivatives
World Council urged the Basel Committee on Banking Supervision, the Bank for International Settlements’ Committee on Payments and Market Infrastructure (CPMI), and the International Organization of Securities Commissions (IOSCO) to revise the Basel III leverage ratio to help preserve community-based financial institutions’ access to affordable interest rate swaps and caps during a consultative meeting at the Federal Reserve Bank of New York on June 14th.
We argued that access to fair and affordable interest rate swaps and caps promotes safety and soundness by helping community-based depository institutions hedge interest rate risks related to fixed-rate mortgage loans held in portfolio and similar fixed-rate investments.
World Council Urges Proportionality in Updated Basel III Disclosure Framework, Supports Proposed Partial Exemption for Non-Internationally Active Institutions
World Council recently urged the Basel Committee on Banking Supervision to emphasize that prudential regulators should consider proportionality when implementing the Basel III “Pillar 3 Disclosure Requirements” framework so that less complex institutions with a lower risk profile are not subject to unnecessary paperwork burdens.
Our comments also strongly supported finalization of the Committee’s proposal to limits the scope of most aspects of the standard to “internationally active banks at the top consolidated levels,” which if finalized would in effect exempt virtually all credit unions and other community-based mutual depository institutions from most aspects of the updated Basel III disclosure framework.
World Council Urges Basel Committee to Limit Reporting Burdens from Expected Credit Loss Exposures Disclosures
World Council urged the Basel Committee on Banking Supervision to adopt a proportional regulatory approach to expected credit loss accounting disclosures in a recent comment letter responding to the Committee's proposed Technical Amendment: Pillar 3 Disclosure Requirements – Regulatory Treatment of Accounting Provisions. The Committee’s proposed Technical Amendment was prompted by the accounting effects of International Financial Reporting Standard 9 (IFRS 9) and US GAAP’s Current Expected Credit Losses (CECL) accounting standard.
World Council’s comments urged the Committee to limit non-complex, community-based financial institutions’ reporting burdens by only requiring national-level disclosures of the geographic breakdowns of loan borrower location, rather than requiring more granular disclosures of borrower location such as by region or city.
World Council also urged the Committee not to require a depository institution to calculate and disclose Total Loss-Absorbing Capacity-related measures as part of its disclosure requirements unless the institution is required to issue Total Loss-Absorbing Capacity instruments.
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
medwards@woccu.org | www.woccu.org