When I first heard of Basel III, I thought it was either some genetic mutation of a plant I often put on homemade pizza, or the latest action movie from Jean-Claude Van Damme (and starring Arnold Schwarzenegger as his wife-cheating sidekick).
After a bit of reading, however, I discovered it was really a plan by central bankers to rein in overly large and complex banking institutions to avoid systemic risk—which, I must add, is like entrusting your liquor cabinet to teenagers.
In any event, it was something learned and forgotten. After all, our little $160 million credit union had as much systemic risk to the financial system as a lemonade stand does to Coca-Cola. There was no reasonable, sensible or arguable way Basel III would ever make its way to our neck of the woods.
So, of course, it did.
Buried in a July 24 request for comment from NCUA was this sentence:
“While it is beyond the scope of this proposed rule, the Board is exploring whether certain Basel III liquidity measures and monitoring tools should be incorporated into NCUA’s supervisory expectations for the very largest credit unions, those over $500 million.”
My first question was, “Is this how NCUA does a CYA?” followed by “The NCUA has expectations?” and finally, “I wonder how long that $500 million threshold will last?”
My guess on the last one is that, in our world of trickle down regulation, probably not long.
So why am I so bent out of shape about something that sounds like a new seasoning for soup? How about a new minimum capital requirement of 10.5%, or even 13%?
For banks, the minimum Basel III capital requirement rises from 8% to 10.5%. Additionally, banks may also need to have up to another 2.5% in capital as a “countercyclical capital buffer” which also would be a good name for a really boring rock group. (They got the name because “slush fund” was already present on so many national banks’ balance sheets.)
If credit unions had the same structure, we’d need to raise significant capital. Of course, all the regulators know of our many ways we can do that (snicker). Yep, just like the old Smith-Barney ad, “We earn it.”
As such, the fallout would be enormous. Consider the following:
► Credit unions lacking the new capital ratio would drive loan rates higher and dividend rates lower, as they attempt to achieve the new ratio. Expenses, too, would need to fall just to keep up.
► Growing credit unions would slow or, in many cases, shrink.
► Supplemental capital, with all of its quirks, would be at the forefront of the bank/credit union debate. And you think banks are torqued on the tax issue.
So if the impacts are huge, the benefits must be too, right? Risk and return? If only it were true. This appears to be a credit union fix for what is easily identifiable as a large bank problem. XYZ Credit Union did not threaten the implosion of the world financial system back in 2008. J.P. Morgan, AIG, and others did. And if the world enters another phase, I’m still guessing that the same players will be in the crosshairs.
This may be a “solution, waiting for a problem.” But to regulators, it may simply be “Soup du Jour.”
JAMES COLLINS is president/CEO at O Bee CU, Tumwater, Wash. Contact him at 360-943-0740.