Removing Barriers Blog

What Happens in Basel Doesn’t Stay in Basel, and That Could be a Good Thing
Posted March 31, 2019 by CUNA Advocacy

The Basel Committee on Banking Supervision is the primary global standard setter for regulation of internationally active banks. So, naturally, what this group does doesn’t affect credit unions, right? Wrong. Well, maybe it affects credit unions in other countries, but surely the work of the Basel Committee doesn’t impact U.S. credit unions, right? Wrong again.

Notwithstanding the mandate of internationally active banks, the Basel Committee has an impact on credit unions here in the United States and around the world. Look no further than NCUA’s risk-based capital rule, which adopts a Basel approach for U.S. credit unions.

Even the Basel Committee acknowledges its standards are not meant for small, non complex institutions, like credit unions. From Basel I through the current standards, Basel III, the Committee focused on the capital adequacy of “international banks” only, with no expectation that the rules would apply to other banks.

But they have been. Regulators in the United States and elsewhere apply these standards to financial institutions of all sizes and complexities, in part, because the Basel Committee is composed of representatives of central banks and supervisors from 28 jurisdictions, it is easier to have one standard and using the Basel Committee’s approach may insulate them from blame in the event of a national-level financial crisis. In other words, regulators — including the FDIC, OCC, Fed, Treasury, and yes, NCUA — pay attention to what the Basel Committee does and says.

The impact of applying standards meant for large, systemically significant banks on credit unions is very well established. Whether the rules have been promulgated by NCUA, CFPB or another agency, one-size-fits-all regulations leads some credit unions to exit certain product offerings and it has contributed to an acceleration of credit union consolidation. Both of these consequences reduce consumer choice and further entrench the market share stranglehold of the largest institutions in the world. In other words, consumers lose.  

In the United States, we have been pushing back hard against one-size-fits-all regulation. Frankly, our results has been mixed. NCUA’s risk-based capital rule will impact far fewer credit unions than was originally proposed, but it still takes concepts meant for internationally active banks and applies them to much less complex financial cooperatives. The CFPB, under its original leadership, failed miserably to implement proportional regulations despite our concerted efforts and the clear intent of the law.

The good news it that the concept of proportionality — that is, setting a standard that is commiserate with the risk of the organization to achieve a desired outcome — may be coming into vogue. The Basel Committee recently conducted a survey of its member organizations and other jurisdiction to assess the extent to which these regulators were implementing standards proportionally.  

I recently joined with colleagues from the Canadian Credit Union Association, the Customer Owned Bank Association (Australia) and the World Council of Credit Unions to meet with the Deputy Secretary General of the Basel Committee and his staff to encourage them to do more to promote and encourage proportionality.  

We believe the survey is just the first step on the part of the Basel Committee. And if so, that is a good thing for credit unions not only with respect to capital standards but more broadly because the more the Basel Committee says about proportionality, the more it helps bolster our arguments with other regulators that their rules should reflect the size and complexity of the entities subject to the rules.  

Imagine how CFPB rulemaking might be different if the Bureau set one standard for nonbank providers and entities with a history of unsafe practices and a different standard for credit unions and other entities with a history of safe practices.  

It is possible to achieve the same level of consumer protection with different standards applied to entities that are heterogeneous. And, whether we call it proportionality or tailoring, right-sized regulations lead to the right outcome for the covered entities and the market in general.  

We know that what happens in Basel doesn’t stay in Basel, but perhaps, in this case, that’s a good thing.

— Ryan Donovan, Chief Advocacy Officer