NEW YORK-With higher capital standards proposed for banks under Basel III guidelines, analysts are concerned over why there is not much discussion within credit unions about how those same rules could affect them.
A number of analysts told Credit Union Journal they believe there is a strong possibility some of the Basel III rules that address capital, liquidity, or enterprise risk management, and which were brought about by the need to have stronger global banking standards, will eventually find their way to credit unions. Higher capital standards is the biggest concern, sources indicate.
CUNA and NAFCU are split on whether Basel III will eventually affect CUs, while NCUA is saying very little about the subject (see related story).
In 2011, Credit Union Journal reported (May 9, 2011) that one analyst, Michael Moebs, economist and CEO at Moebs $ervices, Lake Bluff, Ill., was already sounding the alarm that higher capital standards are likely coming credit unions' way.
Orlando Hanselman, director of education programs for Fiserv risk and compliance, told Credit Union Journal he expects "Basel III creep" to impact credit unions.
Basel III For CUs On The Radar
Peter Duffy, managing director at Sandler O'Neill & Partners, New York, explained the issue of Basel III rules potentially filtering down to CUs has been on the radar at his firm for well over three years. While Duffy speaks with credit unions almost daily on the topic, he expressed concern over the lack of discussion among credit unions about the matter.
"Notice that the proposed Basel III rules started out as being only for the top 19 banks and has worked its way down to banks above $500 million in assets," observed Duffy. "Now, this is interesting-NCUA's current notice for proposed rulemaking on liquidity specifically speaks to Basel III liquidity requirements for credit unions above $500 million in assets. So one would gather that NCUA's next generation of rulemaking might include changes to capital treatment."
While emphasizing the Basel III rules, due to be implemented Jan. 1, 2013, are not final, Duffy stressed the significant impact the rules could have on credit union planning. "It goes toward big considerations, like do I build those branches? Do I do that merger? Do I add that money to marketing," he said.
Duffy indicated that if the rules are applied to CUs there will likely be a five-year phase-in period. "But, to be clear, we don't know whether these rules will be applied to credit unions. We can only guess."
One thing Duffy is certain of is that if the rules make it to credit unions, in addition to higher capital standards, risk weighting of assets is likely, and ROA of investment portfolios will be impacted (see related stories).
According to Duffy, Sandler O'Neill has completed calculations on the impact of higher capital standards on credit unions, but did not want to share the results due to complexities surrounding the findings. "It is very involved, and to just share a number without a lot of details would not be right."
But Moebs went on record last year, stating that CUs will eventually be required to meet an 11% capital minimum. "No one is saying it, so I will," said Moebs in a May 2011, Credit Union Journal report. "The new number for credit unions and community banks will be 11% capital to assets."
Moebs based his analysis on the fact the economic crisis already prompted the FDIC to raise the minimum capital standards for too-big-to fail banks to 7% from 4%, and the proposed Basel III rules.
Fiserv's Hanselman said NCUA's proposed liquidity rule references Basel III and credit unions $500 million in assets and above. "I wonder if that is not a foreshadowing that enterprise risk management, and capital and liquidity standards embedded in Basel III, are about to filter down to credit unions."
Higher Capital Standards Coming
Hanselman firmly believes higher capital standards are coming credit unions' way. "I think NCUA is standing by looking at how Basel III is being rolled out with banks. I have no doubt that at some point in the not-too-distant future, Basel III in some form will affect the credit union space."
There is simply too much global momentum behind Basel III to stop it from moving forward, surmised Duffy. "Some semblance of this is coming, and the implications are high. Whenever you discuss capital, and that you need more of it, you have to figure out how to get that additional capital and at the same time still grow."
