Revised Stress Testing Principles from the Basel Committee on Banking Supervision are expected to reduce the regulatory burdens on credit unions and other community-based financial co-ops.
Regulators across the world implement the Basel standards when conducting stress tests of credit unions and other community based co-operative depository institutions. The changes, agreed last month, will help ensure these tests are carried out on a more proportionate basis, based on the size, complexity, resources and risk profile of the institution.
“These principles are therefore intended to be applied on a proportionate basis, depending on the size, complexity and risk profile of the bank or banking sector for which the authority is responsible,” read the guidelines issued by the Basel Committee.
The decision represents a big win for the World Council of Credit Unions (Woccu), which earlier this year called for a proportional approach to stress testing.
Michael Edwards, who leads WOCCU’s advocacy efforts, said: “World Council members have often reported ‘gold-plating’ and excessive supervision involving stress testing and the Basel Committee’s updated stress testing principles should help end those excessive compliance burdens on credit unions.”
The changes should reduce unnecessarily high capital requirements on a case-by-case basis, he added.
“The results of stress testing often leads to the credit union’s prudential regulator requiring the institution to hold more regulatory capital than the applicable rulebook would normally require,” he said, “so making those tests more proportional should in general reduce capital requirements on community-based institutions that are subject to stress testing, but may help increase capital requirements for the much more complex too-big-to-fail banks that the stress testing rules were originally developed for.”
