Prudential Regulation Authority Rulebook

12.1

In order to ensure a credit union is holding sufficient liquid funds under Credit Unions 9.4, the PRA expects credit unions with more than £50 million in total assets to carry out periodic (at least annual) liquidity stress testing whereby the impact of stressed outflows is considered.

12.2

The liquidity stress testing expectation referred to in paragraph 12.1 could be met by the credit union’s own analysis, which is based on a clearly articulated RAS (see paragraph 10.1) defining the duration and type of stress or stresses that the credit union aims to survive. The PRA expects the stress tests to consider the impact of a range of severe, but plausible scenarios (including combined scenarios). Credit unions should expect the PRA to engage with them on the method used and assumptions made, eg their assessment of the likely run-off of different elements of the retail book.  

12.3

For illustrative purposes, liquidity stress testing referred to in paragraph 12.1 could be met by calculating (total cash + assets that can be realised for cash within eight business days)/total net cash outflows over 30 calendar days, where:

• Total net cash outflows = total expected cash outflows – total expected cash inflows (or 75% of total expected outflows, whichever is greater)
• Total expected cash outflow = (FSCS covered deposits [excluding internet deposits] *5% withdrawal rate) + ([uncovered deposits and internet deposits] *10% withdrawal rate).
• Total expected cash inflow= contractual inflows (ie loan and mortgage payments) expected over 30 day period that are fully performing.

12.4

The above calculation would be expected by the PRA to be more than 100%. Credit unions may use contractual outflows/ inflows and behavioural flows in their calculations. Credit unions should be able to clearly explain their rationale to the PRA. 

12.5

In addition to the expectations set out in Chapters 9 and 11, credit unions with more than £50 million in total assets and/or credit unions that carry out more complex lending (such as providing mortgages or lending to corporates), and/or credit unions that invest in more complex investment products (supranational bonds, corporate bonds, bank bonds, and money market funds) should expect to engage more with the PRA. The PRA expects these credit unions to undertake scenario analysis to identify the impact of key strategic initiatives and external risks on their businesses. Examples of scenarios a credit union may use include: poorer than expected loan book performance; greater than expected increase in shares, higher than expected arrears, changes to welfare benefits, changes in bank interest rates etc. The PRA considers it good practice to look at combined scenarios.

12.6

In addition to the expectations set out in Chapters 10 and 11, the PRA expects credit unions with more than £50 million in assets to consider and document:

• the people, processes, and technology required to deliver critical services;^[12] and
• what scenarios could result in them exceeding their risk appetite, and what actions they will take to respond and react to instances of crystallised operational risk to ensure they remain within their risk appetite. This should include consideration of external disruptions, and where the disruption is initiated at a provider whose products or services support the credit union’s critical services.