Cowboy Accounting, The NCUA Texas Ratio...

Easterners dressed in "cowboy drag" have always amused Texans.  Maybe it's the cut of the shirt, the comical tilt to the oversized hat, the delicateness of the scarf, or just "the walk".... Anyway, somehow "it just don't seem right".

Well, NCUA has got its hat on backwards with its continuing misuse of an old FDIC/OTS risk estimation tool: The Texas Ratio.  Our cowboys are using it to "shoot up" a lot of CUs and also "to validate and justify" the level of loss reserves at the NCUSIF....... and that misuse is getting ready to become a whole, whole lot more dangerous.

Missing the mark and shooting yourself in the foot ain't all that bad, but the next stray shot will probably hit a good bit higher up.  Take a look at this, pardner.

   

According to NCUA:  "The Texas ratio is so named for its use in the banking crisis of the 1980's, when a number of  banks in Texas (and other areas too) failed.  It is particularly useful in identifying financial institutions in danger because of troubled credit conditions.  It is defined as the sum of non-performing assets plus repossessed assets divided by total capital and allowances. For the numerator we will use all loans delinquent more than two months plus repossessed assets.  In the denominator we use net worth plus the allowance for loan and lease losses.  In its simplest interpretation, a Texas ratio above 100% suggests the probability of failure is very high." (From the NCUA: " Evaluating Likely Actual Losses to NCUSIF" - 2010)

(So, let's translate that:  your delinquent loans 60 days>  divided by  your capital & loan loss reserves = your Texas ratio).

In the paper the expert NCUA financial modeler then goes through a statistical analysis of the range of potential losses to the Fund ( between $700m to $2.24b) ......it's an estimate of course, but don't overlook the "Likely Actual Losses" self-important, self-assuredness of the conjurer!  He actually think's it's a valid use of a long established bank benchmark!

The Texas Ratio is an interesting tool in experienced hands, but not when you bastardize its historical framework and corrupt its universally agreed formula and methodolgy.  A misuse of this tool by NCUA which unquestionably leads to an over-reserving at the NCUSIF; to potentially unnecessary premiums for CUs; to inappropriate regulatory pressure on CUs; and to a misrepresentation and overstatement of the level of risk among CUs - particularly to Congress and our members - is fiscally and statistically irresponsible.

So, what's the problem?  The Texas Ratio formula which banking regulators invented - and the historical data reference record it has produced since the 1980's - is based on the same formula used by the NCUA with one exception:  according to the FDIC definition..." Non-current loans = the sum of loans and leases 90 days or more past due plus repossessed assets..."(FDIC Banking Quarterly Profile 2010).

(Easy, go slow, here's the core question: Which is always greater.... your 60 day or greater delinquency ratio? or your 90 day or greater ratio?  Take extra time if you need it....)

Its alright, I guess it's OK, to use a banking ratio from the 1980's to judge CUs in a different decade, a different century, and in an entirely different set of market and economic circumstances.... but nothing justifies this negligent misuse of data - your "NCUA Texas ratio" will always look worse! - against the CU movement - whether purposeful or out of ignorance.  

 Why does NCUA do this to us?  Why do they seek to make us look weak?

And, you ain't seen nothing yet!!!  As we all move forward with implementing the new FASB ammendments on determining loan modifications, TDRs, impairments, and delinquency over the next 12 months, its strangely unnerving to consider who's riding shotgun over all this on our behalf.

Feel comfortable with who's got your back?   Y'know somehow "it just don't seem right"....