Credit Union Capital in a Basel III World
[Pages:20]Credit Union Capital in a Basel III World
International Summit of Cooperatives Quebec, Canada, October 2014 A. Michael Andrews
mike@amandrews.ca
Today's Agenda
vHighlights from Credit Union Capital Adequacy: What's New and What's Next?
vReport sponsored by Filene Research Institute and Credit Union Central of Canada, published February 2014 ?Report addresses international and U.S. developments as well as Canada
vToday's session touches on global developments to provide context, but focuses on the relevance for Canadian credit unions
A. Michael Andrews and Associates Limited
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Basel III and Canadian Credit Unions
vGlobal context ?Motivation for Basel III ?International policy development ?Challenges for the cooperative model ?Relevance of the new standards
vProvincial and federal responses vImpact on Canadian credit unions vLessons for policy-makers vLooking ahead
A. Michael Andrews and Associates Limited
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Motivation for Basel III
vPost-crisis conclusions ?Many banks held too little capital relative to their risk exposure ?Some instruments included as Tier 1 capital did not absorb losses on a going concern basis ?Some instruments included as Tier 2 capital did not absorb losses on a gone concern basis
vBasel III requires banks to hold more, higher quality capital
A. Michael Andrews and Associates Limited
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International Policy Development
vBasel Committee on Banking Supervision is the international standard-setter
vImplementation of global standards is up to national authorities
vBasel III was drafted solely with the joint-stock ownership model in mind
?Problematic for credit unions around the world and the mutual and cooperative banks that account for 20 percent of the European market
?Includes some of the largest banks such as Rabobank and Credit Agricole
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Challenges for Cooperatives
vMajor issue is the Basel III focus on Common Equity Tier I (CET1) as the highest quality capital
vDespite numerous comments, the Basel III final text was modified only slightly with the addition of a footnote to specify that the CET1 criteria will also apply to mutuals and cooperatives
vThe problem is that many instruments commonly issued by mutuals and cooperatives do not meet some of the Basel III CET1 criteria such as permanence and classification as equity for accounting purposes
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Challenges for Cooperatives
vThe European Banking Authority has issued a Regulatory Technical Standard (RTS) on shares issued by cooperative and mutual banks ?Problematic as the RTS is not strictly consistent with the Basel III text ?Contributed to the finding by the Basel Committee that the EU definition of capital is not compliant with the Basel III standards ?Similar issues in the Basel Committee assessment of Switzerland
vOnly real solution--revisit the Basel III text
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Relevance of Basel III
vBasel III is irrelevant for credit unions still at an early stage of development in many countries around the world
vBasel III is more relevant when credit unions are larger and compete more directly with banks
?Level playing field--U.S. regime disadvantages credit unions as higher capital levels are required relative to community banks which will be subject to Basel III
?Market expectations--ratings agencies and investors expect large cooperatives like Desjardins to meet the same capital standards as banks
A. Michael Andrews and Associates Limited
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