Basel Burdens Worry World Council
As smaller, simpler institutions, credit unions worldwide would struggle under the same compliance burdens shouldered by larger, more complex international banks, according to the World Council of Credit Unions.
The Madison, Wis.-based international trade group made its concerns known Friday in a letter to the Basel Committee on Banking Supervision. World Council responded to the committee’s consultative document, Corporate governance principles for banks, which outlined proposed regulatory requirements and director criteria for financial institutions.
World Council noted that the document’s sometimes broad-brush approach may not speak clearly to the committee’s intent. Including credit unions in the same regulatory framework as large, systemically important banks could hobble their ability to function, if not cripple them outright.
“World Council supports the committee’s proposed guidance in most respects,” wrote Michael Edwards, World Council’s vice president and chief counsel, in his Jan. 9 letter. “We are concerned, however, that some elements of the proposal could be read by supervisors as requiring unreasonably burdensome compliance requirements on smaller credit unions with limited staff resources, even though that does not appear to be the committee’s intent.”
Despite its primary emphasis on regulating banks, Basel Committee guidance issued in the past also has had tremendous influence on a variety financial industry regulators, Edwards said, including those overseeing credit unions.
“(The) NCUA and state credit union regulators look to Basel Committee guidance, last revised in 2010, for the best practices on credit union and bank corporate governance,” Edwards said in a separate interview. “Guidance based on this Basel Committee paper is likely to show up in NCUA Letters to Credit Unions and state regulator guidance on credit union corporate governance.”
In its comment letter, World Council supported the Basel Committee’s “principle of proportionality,” applauding the requirement that regulation be scaled to the size of the institutions governed and relative risk their failures would pose.
“Disproportionately burdensome regulatory requirements make it difficult for smaller financial institutions to continue to operate sustainably and promote financial inclusion, financial stability and competitive markets,” the letter noted.
The letter also supported various committee criteria that required boards of directors as a group to present a balance of skills and education necessary for financial institution oversight. However, Edwards also pointed out that some credit unions’ overall lack of economic resources made it difficult for them to engage directors with high levels of financial sophistication.
“In addition, credit unions’ smaller size, less complex operations, and lower risk business activities make it unnecessary for all or most of a credit union’s directors to have prior financial institution experience,” the letter said.
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“With a systemically important bank, the purpose of the stress test is to determine how failure could occur in a very complex financial institution,” the letter said. “This is not necessary for most credit unions because they do not have this level of complexity, meaning that the stress test — if it uses unreasonably pessimistic assumptions — could become an avenue for regulatory imposition of remedial requirements based on hypothetical situations; this approach would impose real life compliance expenses in order to fight imaginary problems.”
In addition to its wider application to the U.S. banking industry, Basel Compliance guidance more than once has influenced NCUA regulations, making credit union input to the committee vital in helping keep the committee’s guidance on track, Edwards said.
One of the best examples of how the earlier 2010 Basel Committee corporate governance guidance paper affected U.S. credit unions, Edwards noted, was the January 2011 adoption of the NCUA’s 12 CFR 701.4 regulation on “General authorities and duties of federal credit union directors” and related NCUA guidance issued in February 2011 in Letter to Federal Credit Unions No. 11-FCU-02, “Duties of Federal Credit Union Boards of Directors.”
“Most significantly, these issuances established credit union director education requirements,” Edwards said, “For the first time directors had to undergo financial education, which did not exist before NCUA and Basel Committee guidance.”
Edwards noted that Basel Committee guidance influenced NCUA’s Part 702 regulation, issued in April 2014, for stress testing credit unions with more than $10 billion in assets.
“The whole stress test idea came from the Basel Committee and the Financial Stability Board, and the Basel Committee corporate governance paper we commented on Friday also advocates stress testing,” Edwards said.
The NCUA also was influenced by Basel Committee guidance regarding liquidity management requirements. Although not required for U.S. credit unions by federal statute, the Basel Committee’s influence is growing in the application of it principles by the NCUA, Edwards said.
“The link between NCUA and state regulator guidance and Basel guidance may not be stated explicitly by the agencies, but many of NCUA’s new regulatory initiatives have originated from Basel Committee guidance, especially over the past several years,” he added. “After the Basel Committee finalizes this corporate governance paper, there will probably be some sort of guidance from NCUA and/or state regulators on credit union corporate governance a few months later.”