WASHINGTON – Including capital in any risk assessment is soimportant, the assessment would be incomplete without it, Fiserv'sOrlando Hanselman told his CU Enterprise Risk Management audienceTuesday morning at the Capital Hilton.

Hanselman, education programs director for Fiserv's Risk andCompliance unit, added that these days, the only true measurementof capital adequacy is stress-tested capital that covers all risksand includes a probability spectrum, from likely to impossible.

Only when an organization is including capital in its enterpriserisk management process has the program reached maturity, hesaid.

And judging by what financial regulators are saying, includingthe NCUA, simply meeting statutory capital requirements won't beenough to win over examiners, he said.

“Whether they call it BASEL III, the Dodd-Frank Act, orwhatever, (regulators) will ultimately say you have to customize your capital based on your risk profile,” Hanselmansaid.

That means credit unions should start thinking beyond a one-sizefits all 7% well-capitalized standard, he urged. Instead, thecooperative financial institutions should determine economiccapital needs, which are based upon both quantifiable andsubjective risk analysis.

Hanselman pitched an institutional-wide number that breakscapital up into how much is allotted to cover credit, market,liquidity and operational risk. To arrive at macros numbers, riskofficers must create a culture in which every single loan pricingdecision includes a capital charge, as well as a funds transferexpense.

Although most credit unions think they use risk-based pricing when making lending decisions, they oftendon't include those two key figures to truly determine the cost ofrisk, Hanselman said. For example, he compared two $100,000 loansat 7.50% APR. One came with twice as much risk as the other, andafter subtracting capital and fund transfer expense charges, theriskier loan produced an $80 net loss, compared to a $460 netprofit for the less risky borrower.

While members – especially those with A-paper credit – willclaim a competing institution will grant them the 7.5% rate,Hanselman encouraged credit unions to make risk-based underwritingdecisions that would require raising the rate, negotiating lessrisky terms, or simply denying the loan.

The economic capital assignment process involves all levels of acredit union, from the board and executive team to productmanagement staff, who can give a better picture of product risksfrom a front-line perspective.

“Product risk worksheets” completed by product managers worktheir way back up to senior executives, who make necessaryadjustments before passing them up to the board room for productpricing and “right-sizing” capital decisions, he said.