Interest rate swaps and caps promote 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, the World Council of Credit Unions wrote Monday. The World Council sent its letter to the Basel Committee on Banking Supervision, the primary global standard setter for the prudential regulation of banks, in response to its consultative document on “Incentives to centrally clear over-the-counter derivatives.”
Specifically, the World Council called for the Basel Committee and other international standard setting bodies should reduce Basel III’s interest rate swap capital requirements to better ensure continued access to interest rate derivatives for credit unions.
“Continued access for credit unions and other community based-financial institutions 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,” the letter reads.
NCUA rules allow credit unions to use interest rate swaps and gcaps to hedge against interest rate risks related to fixed-rate mortgages and other fixed-rate investments.
The World Council is concerned that credit unions that use interest rate swaps and caps may in the future no longer be able to access interest rate derivatives at fair rates, or at all, unless revisions are made to Basel III’s regulatory capital rules fur derivatives.
The World Council participated in a meeting with the Basel Committee and the Financial Stability Board in July, where some large banks said that they would likely drop derivatives clients that have portfolios of less than several billion dollars’ worth of derivatives with a bank because of the high cost of capital beginning next year unless the Basel III derivatives capital requirements are reduced.
Additional details can be found on the World Council’s Advocate blog.