MADISON, Wis. (2/2/10)--The World Council of Credit Unions (WOCCU) is making sure the global credit union movement's voice is heard by the Basel Committee on Banking Supervision, which is considering adjusting its capital adequacy and liquidity requirements of financial institutions worldwide as part of its revisions to the Basel II Accord. The Basel Committee released the revised documents for public comment in December. The new guidelines, adapted with guidance from the Group of 20 (G-20) nations in response to last year's global economic meltdown, recognize for the first time differences between large for-profit financial corporations and non-joint stock companies, which include mutuals, cooperatives and credit unions. Credit union response to these differences and other factors that favorably affect financial cooperatives is critical to ensure that those standards appear in the final guidelines, according to Dave Grace, WOCCU vice president of association services. "This is the first time the Basel Committee has recognized that financial cooperatives are different," said Grace. "We want to make sure these and other standards that enable credit unions to better serve their members appear in the final version. WOCCU in the past has submitted its ideas and suggestions for consideration by the Basel Committee. On April 5, Grace and WOCCU President/CEO Pete Crear traveled to Amsterdam to meet with committee Chairman Nout Wellink, president of The Netherlands Bank, to make the case that credit unions should not be penalized by tougher capital requirements than those faced by larger, riskier institutions that present systemic risk to the global financial system. "We didn't want credit unions and financial cooperatives to pay an unfair price as part of the solution to a crisis they had no hand in making," Crear said. "Chairman Wellink was very receptive to our comments and assured us that he would bring our concerns forth to his fellow committee members." Partly as a result of that visit and WOCCU's work with the committee during the past decade, the current amendments to the Basel II Accord reflect a greater understanding of the different structure and nature of financial cooperatives, said WOCCU. The reform package covers two key areas of interest to credit unions:
* Raising the quality, consistency and transparency of the capital base. The new guidelines seek to ensure that financial institutions move to a higher capital standard that promotes long-term stability and sustainable growth, enabling the banking system to better absorb losses on existing banks and banks that have gone out of business. As for capital quality, the committee proposes that Tier 1 capital be defined as common shares and retained earnings and tailored accordingly for credit unions' structure. Innovative hybrid capital instruments will be phased out. Tier 2 capital instruments must be better aligned and Tier 3 capital instruments should be eliminated. The committee also proposes to enhance capital base transparency by requiring institutions to disclose capital elements in reported accounts. * Reducing procyclicality and promoting countercyclical buffers. A countercyclical capital framework will contribute to a more stable banking system than a procyclical one, which will help dampen rather than amplify economic and financial shocks. To this end, adequate capital buffers at individual institutions should be established. The committee also is promoting more forward-looking provisioning based on expected losses that captures actual losses more transparently and is less procyclical than the current incurred-loss provisioning model.
WOCCU has asked its member organizations worldwide for input on the current revisions to the Basel II Accord as outlined in two consultative documents. (To access these, use the resource link.) WOCCU will aggregate responses to present to the Basel Committee. Comments should be submitted by April 2 to Grace at firstname.lastname@example.org. WOCCU will work with the Basel Committee throughout the year as it completes impact assessments and finalizes the standard by year end. [Editor's note: U.S. credit unions work under the Generally Accepted Accounting Principles (GAAP), and it would take a change in the Federal Credit Union Act to fall under the Basel requirements.]