NCUA Explains How to Cook the Net Worth Ratio

The transcript from NCUA's February 20, 2013 webinar has a NCUA staffer telling credit unions how to cook their books to inflate their net worth ratio for Prompt Corrective Action purposes.

The transcript quotes Dominic Carullo, who is an Economic Development Specialist with the Office of Small Credit Union Initiatives, saying:

"Okay, there are four basic methods available to federally insured credit unions for computing your assets on your quarterly call reports. The first one is using quarter end assets, which is the actual assets at the end of that quarter. There are also three other options. There is the average daily assets over the quarter. There is the average of the three month end balances over the quarter. There is the average of the past four quarter ends."

Dominic Carullo goes on to say:

"The credit union has the option of using any one of the four methods and can use whichever denominator gives it the best net worth ratio. You do not need to be consistent from one quarter to the next. The credit union can change the method is [sic] uses for computing the new worth ratio every quarter. If you get a result that does not please you, you can try the other three methods to see if it can give you a better ratio."

This is crazy.

It is one thing for NCUA to inform credit unions that they have four options available to them for calculating the denominator of the net worth ratio. It is another thing for NCUA to tell credit unions to use whatever method that puts their net worth ratio in the best light.

In addition, if a credit union can change the method it uses for calculating its net worth ratio every quarter, then it is more difficult to evaluate the capital adequacy of a credit union over time. Consistency in reporting is needed for comparability.