Alternative Net Worth Calculation Aids Credit Unions Experiencing Strong Growth

NCUA implemented a new calculation for capital in 2000 that they labeled the net worth ratio. With this new method, credit unions had four options to use in calculating the asset-based denominator

 
 

NCUA implemented a new calculation for capital in 2000 that they labeled the net worth ratio. With this new method, credit unions had four options to use in calculating the asset-based denominator:

  • Net Worth divided by Total Assets
  • Net Worth divided by Average Daily Assets over the Calendar Quarter
  • Net Worth divided by the Average Three-Month End Balances over the Quarter
  • Net Worth divided by the Average of the Current and Three Preceding Quarter End Balances

By using an average asset calculation, credit unions are generally able to boost the overall ratio by decreasing the denominator - especially over a period of strong asset growth.

Out of the 9,733 credit unions as of June 30, 2003, 417 opted to use one of the three alternative asset definitions. These 417 credit unions' $88 billion in assets represent 14% of all credit union assets. In 411 of those cases the alternative definition increased the net worth ratio by an average of 46 basis points.

Many credit unions utilized the alternative definition to compensate for a huge growth in assets. Although the average 12-month asset growth was an already high 12.3% for the industry, the 417 credit unions using an alternative calculation method grew assets at an average of 15.0%, and 67 of these credit unions had asset growth of 20% or greater.

In many other instances these credit unions relied on an alternative calculation to compute an adequate ratio. 120 of the credit unions had a Net Worth/Total Asset ratio that was below 7%, but by using an alternative definition over half of those credit unions could lay claim to a net worth ratio above that threshold.

Credit unions' ability to use alternative forms of capital has been a controversial topic in recent years. When 14% of all industry assets use an alternative definition of assets to increase their net worth ratio does that indicate that alternative forms of capital should be made available? Especially when many of these credit unions rely on the lower denominator calculation for an adequate ratio, would they be better suited improving the ratio with an increased numerator instead?

 

 

 

Sept. 29, 2003


Comments

 
 
 
  • Very interesting. I did not realize CU's were permitted to do this. Could be helpful in certain circumstances!
    Anonymous
     
     
     
  • Thanks for reminder of the alternatives. Could be useful at a future time.
    Anonymous
     
     
     
  • A super article that will help us address some concerns expressed by board members and regulators!
    Anonymous
     
     
     
  • Good fact based article setting context for other policy level discussions.
    Anonymous