MADISON, Wis.–Saying it is “littered with anti-credit union arguments made by bank trade associations,” the World Council of Credit Unions has sent a comment letter strongly opposing the Basel Committee on Banking Supervision’s Core Principles of Effective Supervision of Financial Inclusion proposal.
That the committee even proposed to develop rules for credit unions was a “big surprise,” according to Michael Edwards, General Counsel and VP for Advocacy at the World Council.
“Normally they only focus on big, internationally active too-big-to-fail banks,” said Edwards. “This time they issued a proposal for effective banking supervision of institutions relevant to financial inclusion, and there are a lot of problems with it.”
Edwards said the Committee’s proposal is focused on credit unions in the developing world, but they did not make that point clearly.
“The Committee did not say that so we had to expressly say that for a developed credit union system, this proposal is not appropriate,” said Edwards. “They also said that credit union regulators should not try to promote credit unions at all because that is risky. We pointed out that in general credit unions are less risky than similarly sized banks and that credit unions have not needed to be bailed out by taxpayers.”
WOCCU said that unless the Committee decides to withdraw the proposal, it expects the final version of the guidance to be issued within six to nine months.
Among the points made by WOCCU:
- CUs are Not “Nonbanks.” WOCCU said it strongly opposed the Committee’s proposal to define credit unions (and mutual thrifts) as “nonbank” financial institutions. “In effect, the Committee is proposing that only commercial banks are banking institutions, and any other type of financial institution is a ‘nonbank’,” noted WOCCU, which argued that credit unions are a traditional form of depository institutions and should be recognized as “depository institutions” because the term “nonbank” is defined by the World Bank, the FFIEC, and the European Commission to mean institutions that are not allowed to accept deposits. In addition, WOCCU commented that “the Committee’s conflation of credit unions, building societies and mutual banks with ‘nonbanks’ is likely to be viewed as a symptom of regulatory capture of the Committee by commercial bankers.”
- CUs are For Everyone, Not Just the Poor: WOCCU opposed the Committee’s claim that credit unions are only for poor, unbanked individuals.
- The Proposal is not Appropriate for CUs in the U.S. and Most Other Jurisdictions, Because It Only Considers the Developing World Perspective: WOCCU argued that the proposal was only appropriate for institutions in the developing world, where there is lax supervision of most financial institutions including banks. WOCCU stated specifically that this guidance is not appropriate for credit unions in the U.S. and most other jurisdictions.
- Mutual Thrifts are Not Cooperatives: WOCCU said it opposed the Committee’s proposed definition to include mutual thrifts in the definition of “cooperative financial institution” because mutual thrifts are not cooperatives (unlike CUs) and do not follow cooperative principles. WOCCU suggested that the Committee should consult with the International Co-operative Alliance and review accounting standards for cooperative shares issued by the International Accounting Standards Board so that the Committee will be able to know what types of institutions are cooperatives and which are not.
- Claims that CUs Need to be Regulated More Stringently Than Banks Are Untrue: WOCCU said it also opposed several statements in the proposal saying that credit unions need to be regulated more stringently than banks, because they cannot issue stock and have a membership-based ownership structure without a controlling shareholder.
- Higher Capital Ratios for CUs Compared to Banks: WOCCU said it opposed the Committee’s proposed statement that credit unions need to have a higher capital ratio than a similarly size bank (because credit unions cannot issue stock).
- Claims that Problem CUs are Difficult to Resolve and Should Not Be Allowed to Accept New Members Are Untrue. The Committee claimed in the proposal that it is difficult to resolve problem credit unions and that credit unions that are not well capitalized should not be allowed to accept new members, noted WOCCU. “We argued that prohibiting a new member to join a CU would be self-defeating and that there are many effective, well-established supervisory tools for strengthening or resolving weak credit unions, and that there was no factual basis for higher capital requirements for credit unions since credit unions have a more conservative and less-risky business model than banks do,” noted WOCCU. “We used examples of CU versus bank loan delinquencies in the U.S. during and after the financial crisis (using CUNA data) to help illustrate that credit unions are generally less risky than banks.
- Claims About CU Corporate Governance Are Untrue: WOCCU opposed the Committee’s claims that credit union CEOs are usually the chairman of the CU as well as the claim that credit union internal auditors lack independence. “We argued that, while those claims may be true about small banks, for credit unions the CEO is rarely the chairman and that credit unions’ internal audit function is performed by an independent Supervisory Committee that also has authority to remove credit union officers and directors from office for cause (unlike banks’ internal auditors),” WOCCU said.
- High Initial Capital Requirements for NewCUs are Not Appropriate: WOCCU opposed the proposed statement that credit unions should be subject to a high initial capital requirement (i.e. a credit union cannot be formed legally or open its doors unless it has millions of dollars of initial capital) on the basis that credit unions have traditionally been formed with little or no initial capital and that this has worked well in the context of volunteer-run credit unions. “We also argued that there should be no pre-set initial capital requirement and that the initial amount of capital should be determined on a case-by-case basis as needed to actualize the credit union’s business plan,” WOCCU said.
- Comments Attacking CU Regulators Do Not Make Sense; Taxpayers Around the World have Spent Trillions on Bail-Outs: WOCCU urged the Committee to delete a statement that credit union regulators should not promote credit unions, and argued that commercial banks around the world have received trillions of dollars in governmental capital injections and other subsidies over the years that far exceed any governmental support provided to credit unions.
The Basel Committee’s proposal can be accessed here.
WOCCU’s response can be found here.