Tuesday, March 25, 2014

Risk-Based Capital: Commenting on Your Future - Part 7: THE NCUSIF DEPOSIT FIASCO



Regulatory accounting:
Paper, rock, scissors? 
One of the positive requirements of the proposed NCUA risk-based capital (RBC) rule is that credit unions must comply with "generally accepted accounting procedures" (GAAP) -  except, of course, when NCUA chooses to make up its own accounting rules

Under NCUA's RBC rules, credit unions are required to "write-off" their 1% deposit which funds the cooperative deposit insurance fund (NCUSIF). But NCUA attempts to make this "unaccountable" accounting "sound harmless".  NCUA misleadingly advises that it neutralizes the "write-off" by requiring credit unions to subtract it "from both sides of the balance sheet".


Who's the
"dim bulb"?
The "subtracting it from both sides of the balance sheet" indicates that NCUA is not very bright or, more likely, they think you aren't! Here's why


Clearly if according to GAAP "assets = liabilities", then subtracting 1% from each side (assets minus 1% = liabilities minus 1%) doesn't make any difference, the formula remains balanced.  But that's not what's going on; NCUA is requiring credit unions to subtract the 1% from a very particular "liability account" - your net worth account. Take a look at what happens with a $100 million CU with 10 % net worth…

*  Formula For Risk-based Capital:  Net Worth / Risk Assets
                   (The formula is not "total liab. / risk assets" !!!)

 $10 million net worth/ $100 mill. assets = 10% risk capital

*  Now subtract $1 million from each side:
    
 $9 million net worth/$99 mill. assets =  9% risk capital

…under RBC at 9% your credit union would not be 
                 "well capitalized".

            Have you commented yet?

            regcomments@ncua.gov

                  … don't wait for "never"!

2 comments:

Anonymous said...

The problem for NCUA is they seem determined to require a significant increase in credit union capital and to allow us to count our 1% makes the argument that we already have sufficient even more obvious. The fact remains, if we can take our 1% into a new charter, the 1% is ours. If our 1% is available for any insolvancy of the credit union, it is part of OUR risk profile and analysis.
Georgia Birddog

Anonymous said...

hey Georgia Birddog, thats the 3rd time you mentioned leaving. so, why dont you?
a veiled anonymous threat is just that.
good idea though.