WASHINGTON (8/14/12)--Credit union shares that are perpetual, nonwithdrawable and available to cover institutional losses may be considered "common equity" regulatory capital under guidelines offered by the Basel Committee on Banking Supervision's Basel III document, the World Council of Credit Unions (WOCCU) said in a white paper released on Monday.
Basel III standards will require banks to hold common equity of 4.5% by 2015. In addition, banks must hold a 2.5% conservation buffer, which will be gradually introduced by 2019, and increase Tier 1 levels from 4% to 6% by 2015. These international bank rules are intended to force banks to hold more capital as a buffer against future financial shocks.
Credit union shares with a high degree of permanence and the ability to absorb losses on a going-concern basis should qualify as the most desirable form of capital under Basel III, known as "Common Equity Tier 1 capital," the WOCCU white paper notes. However, the paper adds, credit union shares can qualify as other forms of Basel III regulatory capital even when they do not meet this "Common Equity Tier 1" capital definition.
"As the financial services system becomes more global, credit unions in more countries fall under the local authority application of Basel III guidelines," WOCCU President/CEO Brian Branch said in a release. "A clear understanding of the opportunities and obligations under Basel III is critical for growth and service to members," he added. WOCCU Chief Counsel/Vice President for Advocacy and Government Affairs Michael Edwards noted that while many credit union systems will not implement Basel III requirements, portions of Basel III that determine when credit union shares qualify as regulatory capital under Basel III will be critically important in jurisdictions that do implement Basel III for credit unions.
The WOCCU release said that Australia, Bolivia, Brazil, several Canadian provinces and Ecuador have enacted capital rules for credit unions based on Basel II, and are likely to do the same under Basel III. The Basel III rules do not apply to credit unions, but the debate and discussion that takes place as these new reforms are brought into practice by regulators could provide a new backdrop for and focus on a conversation about alternative capital for credit unions in the U.S.
For the full white paper, use the resource link.