WASHINGTON (2/17/16)--The Basel Committee's decision to exempt virtually all credit unions from its Total Loss Absorbing Capacity (TLAC) regulation means that there will likely be no pressure on the National Credit Union Administration (NCUA) to expand its risk-based capital regulation, according to the World Council of Credit Unions. The exemption would apply to all credit unions in all countries, unless they have branch offices outside the United States that are not on military bases.
In a comment letter filed with the Basel Committee last week, the World Council supported the committee's decision to apply TLAC only to "internationally active" banks.
"Applying TLAC to credit unions and other institutions that do not operate on a cross-border basis would likely impose unjustified capital costs on these institutions," the World Council's letter reads. "Many credit union systems do not have a regulatory framework for issuing TLAC-style instruments like contingent convertible bonds, and the markets for these instruments in the jurisdictions with the necessary legal authority to issue them are neither deep nor liquid, if they exist at all."
The Basel Committee's decision to limit the proposal to internationally active banks is the result of many years of World Council advocacy asking the committee to limit the proposal. For American credit unions, this means the NCUA will likely not face pressure to expand its risk-based capital regulation.
In its letter, the World Council also argued that uninsured term deposits and uninsured shares (such as share certificates), should qualify as TLAC instruments to the extent that any internationally active credit unions are subject to the TLAC rules. This is because these items absorb losses in a liquidation or purchase and assumption transaction, meaning they are factually TLAC.
The World Council also urged the Basel Committee not to finalize a portion of the proposals that would not allow internationally active credit unions to use retained earnings to satisfy a regulatory capital buffer requirement need to qualify as "well capitalized" if the retained earnings are used to satisfy TLAC requirements.
Since credit unions are unlikely to be able to issue significant amounts of TLAC instruments, most credit unions--if any are indeed subject to the TLAC rules--would need to use retained earnings to satisfy the requirements, meaning credit union subject to the TLAC holdings standard would find it very difficult to have enough capital to be considered well capitalized.