NEW YORK-Someday CUs may become accustomed to risk-weighting their assets, as banks currently are required to do, if Basel III rules make it to credit unions.
That's the forecast of Peter Duffy, managing director at Sandler O'Neill & Partners, who believes a great deal of regulatory focus in the U.S., if the Basel III rules in fact are instituted, will be mortgage lending. "With all that happened with the mortgage crisis, I believe the risk weighting of mortgage loans is going to go up."
Under mortgage risk weighting, Duffy predicts a credit quality component will emerge. "In other words, what's the loan-to-value of the mortgage loan. The lower the loan-to-value the lower the risk weighting." Duffy believes treasuries will be zero risk weighted, but agency securities in the bond portfolios will carry a 20% risk weighting. Mortgage loans below 60% loan to value could be weighted at 35%, whereas the risk weighting of a mortgage loan at 90% loan to value could be 100%. "If these rules come credit unions' way, we believe CUs will be doing a calculation to determine the risk nature of their balance sheet based on the credit quality of the asset."