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
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| © 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.
When I was an undergrad at Nicholls State University a "few" years ago (honestly, it feels as if it were only a few years ago), I frequently met a friend for lunch between classes. One day, her class ran overtime, so I met her at her classroom door as she and her fellow geology majors were abuzz with the topic of conversation that day.
What had them so excited?
Most of us at NSU were from the Southern United States, specifically, the most Southern part of Louisiana, near New Orleans. We grew up in a culture rich with history and with much of our activities and economy defined by the water surrounding us. In their geology class that day, the topic of discussion was the long-overdue course-correction of the Mississippi River.
According to the Science Education Resource Center at Carleton College (SERC), the Mississippi River stays put for about 1,000 years, then moves laterally across the Delta Region. The rub? The current course (white line in the satellite photo) has been in place for over 1,300 years.
SERC says that the River deposits enough sediment in its thousand-year stay (hence, the name "Big Muddy") to make the Delta rise. Once the Delta is significantly above sea level, the river channel will migrate to a shorter, more direct route (blue line) to the Gulf of Mexico.
The geology students' excitement that day had to do with the course-correction itself. I heard many of them say they wanted to be there the day it happened to see it first-hand. The business majors among us were concerned about the New Orleans economy after that rather cataclysmic event, but the geologists simply said that New Orleans would still be a vibrant international port city - just a salt-water one. This is truly a geologist's great adventure.
The Banking Industry
What does the River course correction have to do with the Banking industry? A recent report by E&Y - "Rethinking Risk Management" - states that the demands of regulators and, in turn, the reaction of shareholders will change the current banking business model. To me, it is exceedingly evident that the financial services industry business model will change--and change drastically. I don't look at it with fear and trepidation; this is an adventure. Like those geology students, I am excited about the change, and I want very much to be a part of that adventure.
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). 
