And You, Too, Credit Unions

With all of the fuss about risk-based capital in banks (Fuss = US Basel III rules and capital stress testing regimes [e.g., CCAR and DFAST] in the US, BCAR in Canada, and EBA EU-wide stress testing), we tend to exclude the credit union from any discussion of risk-based capital.

However, credit unions have their own set of capital adequacy regulations, the amendments to which have recently been finalized by the National Credit Union Administration (in the US). The amended capital adequacy rules will be effective on January 1, 2019 for “complex” credit unions (i.e., those with assets greater than US$100 million). 

Community Banks Take Note:  While some view credit unions as the enemy because their tax-exempt status gives them an edge over banks, banks aren't required to calculate risk-weighted assets or apply regulatory capital adjustments until their asset size exceeds US$500 million (US Basel III rules). 

A Suggestion for Credit Unions

The new regs for credit unions look suspiciously like Basel's Standardized Approach, so may I offer a suggestion?  2019 seems far away, but if you start now, you can take a bit of time to not only comply with the amended regulations but to also institute risk-based pricing into your credit portfolios.  Many of the smaller community banks were caught flat-footed when the US Basel III rules went into effect. The same thing doesn't have to happen to you if you start now.

In very broad terms, and from a lending perspective, this road map illustrates activities that can be undertaken now.  The plan here is to have a "dress rehearsal" of sorts a year before you have to go live with the amendments.

Part 702 Compliance and Credit Scoring Road Map

© Tara Heusé Skinner

With the institution of internal credit scorecards and risk-based pricing in addition to risk-based capital requirements, you should see positive cash flow on your compliance costs.  Ensure compliance on January 1, 2019, but ensure that you are also able to pass profits on to your members.