Basel Committee introduces simplified approach to market risk framework

Credit unions to face reduced regulatory burdens

Credit unions could see their regulatory burdens reduced following amendments to the Basel III market risk framework adopted on 14 January.

The World Council of Credit Unions (Woccu), which has been campaigning for a more proportional regulatory approach, welcomed the news.

Basel III’s approach to market risk sets many banks’ and credit unions’ reserve requirements for available-for-sale securities and derivatives positions under risk-based capital rules.

According to Woccu, the simplified approach to market risk will limit regulatory burdens by retaining the existing Basel II standardised approach to market risk with the addition of a “scaling factor” add-on that the committee reduced from its original proposal.

Related: Basel Committee reduces disclosure burdens for credit unions

Due to take effect from January 2022, the simplified approach will be available for credit unions and banks unless the institution is one of the world’s 29 largest banks, uses internal models or trades in some types of options. The final version of the standard retains the Basel II approach to market risk with a 30% add-on for interest rate derivatives, which a decrease from the 50 to 100% add-on originally proposed by the committee.

In a letter sent on 20 June last year to William Coen, secretary general of the Basel Committee on Banking Supervision, Woccu urged the committee not to include scaling factor multipliers in the final version of the Simplified Alternative.

But it added that, if scaling factors were necessary to achieve safe and sound regulation of community-based financial institutions, a maximum scaling factor of 1.25 – a market-risk reserve increase of 25% compared to Basel II market risk reserves – would be “sufficiently conservative with respect to reserves for interest rate risk, foreign exchange risk, and commodities risk”.

“We are very pleased that the Basel Committee has finalised a proportional regulatory approach to market risk reserves that will help limit compliance burdens on credit unions and other community-based depository institutions,” said Michael Edwards. Woccu’s senior vice president and general counsel.

“We also strongly support the Committee’s decision to significantly reduce the amount of additional reserves community-based institutions will be required to hold against interest rate swaps and caps under the simplified approach, compared to its proposal.”

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