Sometimes things you didn't think would affect you sneak up onyou by surprise, whether out of nowhere or ignorance or you'remerely preoccupied with other things.  

Dodd-Frank has certainly become something that can't be ignored.In fact, during a recent web seminar we hosted concerning regulatory compliance, more than 66% of attendees said the lawwould play a significant role in their planning for 2013. On theother hand, 34% reported it would have a minor role or none at all.Hopefully, those are the ones who are already prepared for theconsumer protection and transparency regulations that are coming tofruition.

Executive compensation disclosure could be a part of thetransparency trend, and as I've advocated in the past, it shouldbe. Currently, only state charters are not exempted fromcompensation disclosure. As the last of the tax-exempt,not-for-profits not to disclose, it can make outsiders and membersmore suspicious of salaries paid to top credit union executiveswhen, in most cases, there's really nothing to hide. And wherethere is, then problem solved. 

Every year their top executives' pay is released and theindustry groans about the figures. If you expect transparency fromyour regulator, you have to walk the talk. Interestingly, 59% ofour Dodd-Frank web seminar participants said greater transparencywill be good for credit unions. Respondents weren't specificallyreferring to executive compensation, but that's certainly a pieceof it.

Dodd-Frank was initiated to fix the financial institution crisisbrought on by many of the larger players–systemically importantfinancial institutions–that made the bad loans and doubly badinvestments. But like so much of legislation and regulation, thecommunity banks and credit unions that followed the rules werestill ensnared in that trap even if only indirectly in somecases. 

The same could be true for the Basel Accords and all of itssequels, which were intended to only apply to internationalfinancial institutions. I won't even pretend to understand all ofwhat is being discussed (and don't you either), but it's capitalreform. The intention of Basel is to prevent the largest banks fromoverleveraging themselves and wreaking havoc in the globalfinancial system should one fail.

Credit unions are in serious need of capital reform because theratios fixed in the Federal Credit Union Act under promptcorrective action (Wasn't PCA thrust upon credit unions primarilybecause of bad actors in the banking sector? Hmm, methinks I see apattern.) can actually make them riskier or force them to miss outon business opportunities because their risks aren't properlyweighted. 

Credit unions are required to carry 7% capital to be consideredwell-capitalized, even though the credit union movement inaggregate is barely a SIFI, yet the international bankingregulators are just getting around to considering 6% Tier 1 capitalfor systemically important banks? FDIC currently requires 10%risk-based, 6% Tier 1 capital and 5% leverage ratio to bewell-capitalized.

What could affect credit unions is the risk weighting of assets.According to the NCUA's Larry Fazio, as the banking regulatorsrework their regulations, the agency is required to consult withthe banking regulators (Section 216 of the FCUA, I looked it up.)regarding any increase or decrease in the minimum level for theleverage limit. Fazio explained that the potential effect on creditunions would be in the modification of some of the riskdistinctions, and that it could increase or decrease a creditunion's need for capital based upon its risk profile. MoreTreasuries, less capital necessary. Commercial real estate loans,more capital might be necessary. But it would all depending on howBasel III shakes out. With an industry-wide net worth ratio of10%, well above the required 7%, the credit union community as awhole won't be in dire straits. It could open up opportunities formany credit unions. In any case, the better the risk is measuredthe more efficiently and safely the business can run.

Some credit unions might make that opportunity member businesslending, which of course, could automatically drive up the riskportfolio. Still, it doesn't mean credit unions can effectivelymanage that risk. While member business lending legislation willnot move forward on its own, there's still a possibility for it tomove as part of another bill. Unfortunately. that would take aChristmas miracle.

As of press time, Senate Majority Leader Reid, who promisedcredit unions a floor vote on business lending, filed cloture onthe transaction account guarantee bill, which means they likelyhave the 60 votes to pass the legislation the community bankershave been pushing hard for and kept credit unions from addingmember business lending to. It will be a real kick in the pants forcredit unions' lobbying prowess if TAG, legislation that encouragesmoral hazard, passes in a single legislative session and creditunions can't get business lending–a zero-expense, economy-boosting,job-providing bill–within a decade.