Basel Proposal Favors Risk-Based Capital
The Basel Committee on Banking Supervision’s proposed guidelines for dealing with weak banks could harm small institutions, recommending a risk-based capital requirement for all, the World Council of Credit Unions said in a Sept. 19 comment letter.
The Basel Committee on Banking Supervision’s proposed Supervisory Guidelines for Identifying and Dealing with Weak Banks, aconsultative document released for comment in June, provides regulators with guidance for identifying and intervening with struggling financial institutions.
World Council decried Basel language that said all financial institutions, regardless of size, should be subjected to the same basic regulations, including risk-based capital requirements.
However, the proposed directive differs from other Basel committee issuances, according to Michael Edwards, World Council vice president and chief counsel, because it suggests supervisors observe the “principle of proportionality” with respect to regulatory burdens and the level of complexity of the regulated institution. In many cases, implied compliance measures could overwhelm small institutions and make compliance too costly to manage, he added.
World Council noted that requiring the same standards for all institutions unfairly penalizes credit unions and other small financial cooperatives and does not enforce the committee’s own concept of proportionality.
Basel also recommended proposed corrective action in cases where compliance standards are not met that includes “forced restructuring”, which could be interpreted by regulators as favoring mandatory conversion of credit unions and similar mutual institutions to joint-stock companies, World Council said.
The letter also raised concerns over supervisory discretion that allows too much discretion and may afoul of rule-of-law principles; for example, regulators that cite general legal powers to protect safety and soundness to take actions that are prohibited by other legal provisions. Too much supervisory discretion could also require unnecessary and expensive stress testing for credit unions.
Credit union-to-bank conversions, which in Eastern Europe are being considered mandatory for problem institutions, raise similar concerns in light of conversion activities among U.S. credit unions.
“Regulatory burden is also a theme in all of those discussions,” Edwards said.
Edwards cautioned U.S. credit unions not to ignore implications of the Basel committee’s actions. He also noted several areas in which the current proposal dovetails with issues facing U.S. credit unions.
“From a U.S. credit union standpoint, the letter’s content is relevant because it argues against risk-based capital for most credit unions because it’s unnecessary and gives big banks an unfair advantage,” Edwards said.
“Financial sector competition becomes a game played by titans against Lilliputians, with the titans having a distinct advantage because their larger economies of scale make them better able to bear increased compliance costs than their smaller competitors” the letter read.
“These factors combine to give the largest banks a distinct competitive advantage over smaller financial institutions, even though this harms consumers and even though these costly rules are usually designed to reign in excessively risky financial activities mainly practiced by the same large banks,” the letter added.
The World Council’s comments also requested more detailed guidance in defining what constitutes a weak bank. The letter proposed that stabilization funding to weak institutions from public- and private-sector capital injections not be taxed.
No date has been set for the release of the Basel committee’s final guidance on this topic. But based on the committee’s past practice, Edwards said he expects it to be released in late spring or early summer 2015.