The Basel Committee lacks credibility on credit unions

The Basel Committee on Banking Supervision, which is headquartered at the Bank for International Settlements in Basel, Switzerland, calls itself “the primary global standard-setter for the prudential regulation of banks and provides a forum for cooperation on banking supervisory matters.” Many countries around the world have adopted Basel Committee standards for banks, and sometimes also for credit unions, because of the Committee’s supposed expertise regarding banking regulation.  Although credit union supervisors like the National Credit Union Administration (NCUA) have occasionally looked to Basel standards to inspire their credit union rules—such as NCUA’s Basel III-derived “Risk-Based Capital 2” (RBC2) regulation, for example—until recently the Basel Committee had never issued guidance targeted at credit unions specifically.

That changed a few months ago: In a recent proposal, Guidance on the Application of the Core Principles for Effective Banking Supervision to the Regulation and Supervision of Institutions Relevant to Financial Inclusion, the Basel Committee had a lot to say about credit unions.  Unfortunately, despite years of outreach, meetings and written comments to the Committee by World Council of Credit Unions (World Council), many of the Committee’s proposed statements betray a fundamental lack of knowledge and understanding about credit unions.  World Council submitted detailed comments in response to this proposal and we and our member associations continue to advocate for the Committee to retract its inaccurate claims about credit unions.  Whether or not the Basel Committee revises these statements in the final version of the guidance, however, credit unions and their regulators should take this opportunity to understand how little expertise the Basel Committee really has on the subject of credit union regulation.

As a threshold matter, the Basel Committee proposal seeks to define credit unions as “non-bank” financial institutions rather than as depository institutions.  “Non-bank” is a term that the World Bank, the Federal Financial Institutions Examination Council (FFIEC), the European Commission and others define as applying only to non-depository financial institutions like insurance companies, securities broker-dealers, mortgage companies, pawnbrokers, hedge funds and shadow banking institutions.  But according to the Basel Committee’s logic, a credit union is not a “bank” so therefore it is a “non-bank.”  The proposal also states that, in general, non-banks should not be permitted to accept deposits.

In addition, the Basel Committee proposes that credit unions should be prohibited from accepting new members if they are not well capitalized: “Financial cooperatives may also require specific corrective and sanctioning actions, due to their membership-based structure . . . For instance, the supervisor may consider restricting new membership in financial cooperatives during the implementation of a corrective measure . . .”  In reality, restricting new membership for credit unions during implementation of corrective measures like a Net Worth Restoration Plan would be self-defeating because it could cause a run on the institution and would diminish the ability of the credit union to raise new capital in the form of retained earnings.

The Basel Committee’s proposal also makes claims about credit union corporate governance that ignore similar problems at banks and are not consistent with credit unions’ legal and regulatory structure.  Specifically, the Basel Committee proposal states that “certain weaknesses in the Board structure and functioning are more common in financial cooperatives and microlending institutions than in banks . . . In small institutions, the chief executive is often also chair of the Board and it is not uncommon for the internal auditor to lack independence.  Governance in financial cooperatives poses additional challenges given their membership-based structure, which gives room for conflicts of interest that may lead to poor oversight, excessive risk-taking and frauds.”

Many joint-stock banks, large and small, have suffered extensively from “poor oversight, excessive risk-taking and frauds” and, contrary to the Basel Committee’s claims, credit unions generally have a lower-risk and less-complex business model than similarly sized banks.  Unlike large banks such as Bank of America, at a credit union the CEO and board chairman roles are rarely combined because of the Federal Credit Union Act’s legal requirement (and similar requirements in other credit union acts) that only one board member can be compensated as an officer of the credit union.  At credit unions the internal audit function is typically performed by the member-elected Supervisory Committee, and the Supervisory Committee is not only independent of management but, unlike a bank’s internal auditor, also has legal authority to suspend the credit union’s officers and board members.

So if the Basel Committee is completely misinformed about credit unions, why are NCUA and other agencies adopting Basel-inspired regulations like the RBC2 rules?  The Basel Committee’s credibility as a standard setting body is premised on its supposed technocratic expertise.  Yet, based on this proposal, the Basel Committee has little understanding of the credit union model.  The credit union movement should remember the Basel Committee’s inaccurate claims about credit unions the next time that regulators want to import financial rules from Switzerland . . . watches or cheese would be better choices.