Friday, July 15, 2016

Risk-Based Capital: Commenting on Your Future - Part 4: THE NCUSIF DEPOSIT FIASCO

(Originally published 3/24/14)
... in which NCUA even writes itself off!

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".


No comments: