The Basel Committee on Banking Supervision's proposed guidelinesfor dealing with weak banks could harm small institutions,recommending a risk-based capital requirement for all, the World Council of Credit Unions said in a Sept. 19 commentletter.

The Basel Committee on Banking Supervision's proposedSupervisory Guidelines for Identifying and Dealing with WeakBanks, aconsultative document released for comment in June,provides regulators with guidance for identifying and interveningwith struggling financial institutions.

World Council decried Basel language that said all financialinstitutions, regardless of size, should be subjected to the samebasic regulations, including risk-based capital requirements.

However, the proposed directive differs from other Baselcommittee issuances, according to Michael Edwards, World Council vice president and chiefcounsel, because it suggests supervisors observe the “principle ofproportionality” with respect to regulatory burdens and the levelof complexity of the regulated institution. In many cases, impliedcompliance measures could overwhelm small institutions and makecompliance too costly to manage, he added.

World Council noted that requiring the same standards for allinstitutions unfairly penalizes credit unions and other smallfinancial cooperatives and does not enforce the committee's ownconcept of proportionality.

Basel also recommended proposed corrective action in cases wherecompliance standards are not met that includes “forcedrestructuring”, which could be interpreted by regulators asfavoring mandatory conversion of credit unions and similar mutualinstitutions to joint-stock companies, World Council said.

The letter also raised concerns over supervisory discretionthat allows too much discretion and may afoul of rule-of-lawprinciples; for example, regulators that cite general legal powersto protect safety and soundness to take actions that areprohibited by other legal provisions. Too much supervisorydiscretion could also require unnecessary and expensive stresstesting for credit unions.

Credit union-to-bank conversions, which in Eastern Europe arebeing considered mandatory for problem institutions, raise similarconcerns in light of conversion activities among U.S. creditunions.

“Regulatory burden is also a theme in all of those discussions,”Edwards said.

Edwards cautioned U.S. credit unions not to ignore implicationsof the Basel committee's actions. He also noted several areas in whichthe current proposal dovetails with issues facing U.S. creditunions.

“From a U.S. credit union standpoint, the letter's content isrelevant because it argues against risk-based capital for mostcredit unions because it's unnecessary and gives big banks anunfair advantage,” Edwards said.

“Financial sector competition becomes a game played bytitans against Lilliputians, with the titans having a distinctadvantage because their larger economies of scale make them betterable to bear increased compliance costs than their smallercompetitors” the letter read.

“These factors combine to give the largest banks a distinctcompetitive advantage over smaller financial institutions, eventhough this harms consumers and even though these costly rules areusually designed to reign in excessively risky financial activitiesmainly practiced by the same large banks,” the letter added.

The World Council's comments also requested more detailedguidance in defining what constitutes a weak bank. The letterproposed that stabilization funding to weak institutions frompublic- and private-sector capital injections not be taxed.

No date has been set for the release of the Basel committee'sfinal guidance on this topic. But based on the committee's pastpractice, Edwards said he expects it to be released in late springor early summer 2015.