MADISON, Wis.–The World Council of Credit Unions has sent a comment letter to the Basel Committee for Banking Supervision’s consultation on Total Loss Absorbing Capacity Holdings (TLAC).
The Basel Committee had earlier issued TLAC to expand requirements to all active banks.
WOCCU said it supported the proposal’s requirement to issue TLAC, but only to “internationally active banks” because, if finalized as written, the language means that virtually all credit unions will be exempted from this requirement. WOCCU noted that generally speaking, financial institutions that are subject to TLAC rules will need to issue bonds to outside investors, something that is nearly impossible for most credit unions.
WOCCU said the language in the proposal follows years of advocacy on its part asking the Basel Committee to limit its rules to “internationally active banks.”
“This means that the National Credit Union Administration will not likely face pressure to expand its risk-based capital regulation, based on Basel III to include TLAC rules for U.S. credit unions,” a WOCCU spokesperson told CUToday.info.
In its letter WOCCU also argued that uninsured term deposits and uninsured shares (such as share certificates) should qualify as TLAC instruments—to the extent that any credit unions are subject to these TLAC rules—because these items absorb losses in a liquidation or purchase and assumption transaction, meaning that they are TLAC as a factual matter.
Finally, WOCCU called on the Basel Committee not to finalize a portion of the proposal that would not allow credit unions to use retained earnings to satisfy a regulatory capital “buffer” requirement need to qualify as “well capitalized” if the retained earnings are also being used to satisfy TLAC requirements, since credit unions are unlikely to be able to issue significant amounts of TLAC instruments, most credit unions would need to use retained earnings to satisfy TLAC requirements (unless uninsured deposits and shares qualify as TLAC), which means that credit unions that are subject to the TLAC holdings standard would find it very difficult to have enough capital to be considered well-capitalized unless they had at least 16% retained earnings relative to total assets.
A copy of the WOCCU letter can be found here.