MADISON, Wis. (3/20/09)--World Council of Credit Unions (WOCCU) is calling for a fundamental review of the Basel II capital framework by the Basel Committee on Banking Supervision so smaller institutions and credit unions that fared better during the recession aren't subject to tougher capital requirements than larger, riskier institutions that present systemic risk. In three letters to Basel Committee Chairman Nout Wellink, Dave Grace, WOCCU's vice president of association services, urged the committee to "rebalance" inconsistencies outlined in its consultative documents, which classify small financial cooperatives together with large, more complex banks. The letters are in response to the Basel Committee's March 12 announcement that all financial institution capital levels will need to be raised to increase resilience to future economic and financial stress. Its process aims to increase not only the amounts, but also the quality of capital required; improve the risk coverage of capital structures; and enact supplementary protective measures. Cooperative financial institutions help spread economic risk over a greater number of institutions, said WOCCU. By contrast, existing industry risk-modeling standards have failed to keep large banks from hemorrhaging losses. Smaller institutions, especially member-owned financial cooperatives, hold smaller concentrations of funds, strengthening the global financial network by reducing the risk each institutions poses, WOCCU added. "While we understand the committee's interest in advancing risk modeling, the current crisis may indicate that existing models were not well-developed to begin with, causing many banking sectors to suffer high levels of concentrated risk among few institutions," Grace wrote in a March 13 letter. He noted that no financial cooperatives have been bailed out with taxpayer dollars. According to a 2007 International Monetary Fund study, financial cooperatives in general are more stable than commercial banks, especially considering threats to their viability based on earnings and capital. Basel II means larger entities could hold comparatively less capital than smaller institutions. However, the current crisis has shown many larger institutions are riskier and prone to greater systemic problems, Grace wrote. Failure to rebalance capital requirements within Basel II to appropriate levels will potentially weaken smaller institutions WOCCU's position also emphasized the need for stress-testing procedures appropriate to financial cooperatives. "Unfortunately, it's taken a crisis of the current magnitude to demonstrate our point that credit unions are conservatively managed institutions with lower risk profiles on average than larger commercial banks," Grace said. "Our message to the Basel Committee is essentially, 'Don't punish us--we're not banks.' Modifying the edges of Basel II as the proposals suggest may cover some existing gaps but will do little to lessen the blow of future problems in the financial sector." Capital-level compliance by global financial institutions in response to the announcement will not go under review until 2010 due to the financial industry's current inability to meet the newly defined capital levels. Grace will represent WOCCU at an April 15 meeting with Wellink in Amsterdam to ensure policymakers take into account credit unions' needs. To view the three letters in their entirety, use the link.