BLAST FROM THE PAST!
(Originally published 3/24/14)
... in which NCUA even writes itself off!
Paper, rock, scissors?
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".
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".