World Council supports proportionality in Basel credit losses proposal

May 6, 2015

WASHINGTON (5/6/15)--The World Council of Credit Unions strongly supports the “concept of proportionality” proposed in a Basel Committee consultative document on expected credit losses (ECLs) as a way to reduce regulatory burdens on less complex financial institutions like most credit unions. The Basel committee on Banking Supervision is the primary global entity that sets standards for financial institution regulations.

The committee issued the document in February. It sets forth supervisory expectations for expected credit losses (ECL) accounting that are consistent with the accounting standards established by the International Accounting Standards Board.

Specifically, the proposal states that financial institutions should follow an expected credit loss model for provisioning the allowance for loan losses. The proposal also does not state that an institution should adopt any particular set of expected credit loss rules. However, for U.S. credit unions the only ECL method option available under U.S. Generally Accepted Accounting Principles (US GAAP) would be the current expected credit losses (CECL) standard developed by the Financial Accounting Standards Board (FASB).

In its comment letter filed last week, the World Council raised three points:

  • Strong support for the concept of proportionality that would allow less complex financial institutions, such as most credit unions, that are smaller than large international banks to adopt approaches “commensurate with the size, nature and complexity of their lending exposures.” World Council states that many credit unions would find it “prohibitively expensive to implement aspects of this proposal intended for internationally active banks;”
  • Support for the proposed approach of giving an institution’s management the primary role in determining the institution’s credit risk management policy in a manner consistent with applicable accounting rules; and
  • World Council urges the committee to provide regulators and national accounting authorities with flexibility regarding less complex financial institutions’ expected credit loss accounting under various ECL accounting standards by allowing “practical expedients” that could help lower regulatory burdens further.  

CUNA has opposed FASB's CECL method for US GAAP in several letters in recent years--one sent in August 2014 and one sent in May 2013.