Basel misses the mark on CU proposal: World Council

April 5, 2016

WASHINGTON (4/5/16)--Statements from a Basel Committee on Banking Supervision proposal on the regulation of what it calls “nonbanks” contain numerous inaccurate claims that credit unions need to be regulated more stringently than banks, according to the World Council of Credit Unions. The World Council filed a comment letter last week responding to the Basel Committee’s proposal on the regulation of nonbanks that promote financial inclusion.

The Basel Committee, based in Switzerland, is the primary global standard-setter for regulation of banks around the world. Is composed of representatives from the U.S. Treasury, Federal Reserve board, and Federal Deposit Insurance Corp. as well as representatives from similar foreign governments’ financial regulatory agencies

The World Council takes issue with the committee’s proposal to define credit union as “nonbanks,” since credit unions are depository institutions and organizations such as the World Bank, U.S. Federal Financial Institutions Examination Council and the European Commission define “nonbank” as institutions that are not allowed to accept deposits.

The World Council also opposed the proposed regulatory standards for credit unions that are more stringent than commercial banks or joint-stock financial institutions.

“These aspects of the proposal--whether intentional or not--effectively call for favoritism on the part of supervisors to the benefit of commercial banks and joint-stock microfinance institutions and to the detriment of credit unions and other mutual depository institutions like building societies and mutual banks,” the letter reads. “In general, credit unions have a more conservative and lower-risk operating philosophy compared to their joint-stock company competitors.”

Specifically, the World Council stated that:

  • There is no reason credit unions need to have a higher capital ratio than similarly sized banks;
  • It would be self-defeating to enact the committee’s proposal that credit unions that are not well capitalized should not be allowed to accept new members;
  • Credit unions’ CEOs and board chairs are rarely the same individual, contrary to the claims of the Basel Committee in the proposal; and
  • There should not be a preset capital requirement for new credit unions. The World Council believes that the initial amount of capital should be determined on a case-by-case basis.

The World Council’s comments also stated that the Basel Committee’s proposal is only appropriate for institutions in the developing world, where there is lax supervision of most financial institutions including banks. It specifically notes that the proposal is not appropriate for credit unions in the United States and most other jurisdictions.

Basel Committee standards often affect U.S. credit unions. According to the World Council, this often happens when the National Credit Union Administration faces pressure from the Treasury to change its rules or guidance in some respect to be more like the regulations applicable to banks.