Capital

Part

CRED Credit Unions

Chapter

Capital

Printed on: 01/11/2024

Rulebook at: 01/08/2007

CRED 8

Capital

CRED 8.1

Application and purpose

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CRED 8.1.1

This chapter applies to all credit unions.

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CRED 8.1.2

It amplifies Principle 4 under which a firm must maintain adequate financial resources and the threshold condition that a firm's resources must be adequate in relation to the regulated activities that it carries on.

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CRED 8.1.3

The purpose of setting capital requirements is to ensure that a credit union has an appropriate level of capital available to absorb unexpected losses.

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CRED 8.1.4

The capital and net worth requirements set out in this chapter represent the minimum requirements that a credit union must comply with. A credit union should decide for itself the amount of capital that it needs to hold over and above these minimum standards proportionate to its scale of operations and its risk profile.

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CRED 8.1.5

The FSA may require a credit union to hold minimum amounts of capital greater than those set out below where it considers that particular circumstances make that appropriate.

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CRED 8.2

Components of capital

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CRED 8.2.1

(1) The following are included in the meaning of 'capital' for the purposes of this chapter:

(a) audited reserves;
(b) interim net profits;
(c) subordinated debt meeting the requirements set out at CRED 8.2.1 R (4);
(d) initial capital; and
(e) revaluation reserves, arising from the differences between book values and the current market values of property fixed assets:

(i) meeting the requirements in CRED 8.2.1 R (6) to CRED 8.2.1 R (7); and
(ii) subject to the limit in CRED 8.2.1 R (8).

(2) Audited reserves are audited accumulated profits or losses, or both, retained by a credit union after payment of tax and dividends. Reserves also include other realised gains and gifts of capital - for example from a sponsoring organisation.
(3) Interim net profits are interim profits net of tax and anticipated dividends.
(4) To be included in the calculation of capital, subordinated debt must meet the following conditions:

(a) the maturity of the loan must be more than five years from the date on which the loan is made;
(b) the subordination provisions provide that the claims of the subordinated creditors rank behind those of all unsubordinated creditors including the credit union's shareholders;
(c) to the fullest extent possible creditors waive their rights to set off amounts they owe the credit union against subordinated amounts owed to them by the credit union;
(d) the only events of default are non-payment of any interest or principal under the debt agreement or the winding-up of the credit union;
(e) the remedies available to the subordinated creditor in the event of default in respect of the subordinated debt are limited to petitioning for the winding up of the credit union or proving for and claiming in the liquidation of the credit union;
(f) the subordinated debt must not become due and payable before its stated final maturity date except on an event of default complying with (d);
(g) the terms of the subordinated debt must be set out in a written agreement or instrument that contains terms that provide for the above conditions;
(h) the debt must be unsecured and fully paid up.

(5) Initial capital is a credit union's capital at the time it is given Part IV permission to accept deposits, but this does not apply in cases where the credit union is treated as having such a permission on credit unions day. Initial capital consists of a credit union's assets less its liabilities other than the liabilities set out in CRED 8.2.1 R(a)-(c).
(6) To be included in the calculation of capital, revaluation reserves must meet the following conditions:

(a) the credit union must apply the revaluation method to all of its property fixed assets and not selectively;
(b) the values must result from regular professional valuations of each property;
(c) if professional valuations are not carried out annually, there must be:

(i) a rolling programme such that no professional valuation of a property is more than five years old;
(ii) in the intervening year(s) in which a property is not professionally valued, an interpolation of value by the Board which takes into account any decline in property values disclosed by valuations of other properties in that year;

(d) any increase of revaluation reserve must be supported by a professional valuation.

(7) Subject to the conditions in CRED 8.2.1 R (6), and the limit in CRED 8.2.1 R (8), the amount of revaluation reserve used for the calculation of capital must be:

(a) the amount standing to the credit of any such reserve in the balance sheet in the most recent annual return to have been sent to the FSA under SUP 16.7.62 R (see CRED 14.10.7 G); or
(b) the amount of any such reserve in the accounting records of the credit union, for the time being;

whichever is the lesser amount.
(8) The amount of revaluation reserve included in the calculation of capital must not represent more than 25 per cent of the total of capital resources in CRED 8.2.1 R (1)(a) to CRED 8.2.1 R (1)(e).

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CRED 8.2.1A

The effect of CRED 8.2.1 R(4)(a) is that the shortest permissible period for a subordinated loan qualifying as capital under CRED 8.2.1 R(4)(a) is five years and one day.

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CRED 8.2.1B

Subordinated debt is due and payable only in accordance with CRED 8.2.1 R (4). However, this rule does not prevent the debt from being issued on terms which permit the credit union, in accordance with a board resolution, to repay the debt. The decision to repay the debt should be genuinely at the instance of the credit union's board. The credit union should satisfy itself that the remaining capital would be adequate for the credit union's present, and future foreseeable needs. The credit union should notify the FSA at least one month in advance of its intention to repay the debt (as indicated in CRED 14.9.5 G (3)), thereby giving the FSA the opportunity to raise objections to the proposed repayment. If repayment is proposed within the first five years, the FSA is likely to consider exercising its own-initiative powers to ensure that the credit union continues to satisfy the threshold conditions.

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CRED 8.2.1C

The effect of CRED 8.2.1 R (8) is that no more than 25 per cent of a credit union's regulatory capital may consist of amounts deriving from the revaluation of property, however large the amount standing to the credit of the credit union's revaluation reserve.

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CRED 8.2.2

Negative reserves and any interim net losses must be deducted from capital.

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CRED 8.2.3

The amount of any subordinated loan counting towards a credit union's regulatory capital must, over its final four years to maturity, be written down by 20% of the amount of the loan per year. (See Table 8.2.4R.)

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CRED 8.2.4

Writing down subordinated loans over final four years This table belongs to CRED 8.2.3 R

Years to maturity

Amount of loan counting towards capital

More than 4

100%

Less than and including 4 but more than 3

80%

Less than and including 3 but more than 2

60%

Less than and including 2 but more than 1

40%

Less than and including 1

20%

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CRED 8.2.5

(1) When a credit union makes a subordinated loan to another credit union qualifying as capital under CRED 8.2.1 R(4)(a), the full amount of the loan (not the amount counting towards the borrower's capital under CRED 8.2.4 R) must be deducted from the lender's capital.
(2) A subordinated loan within CRED 8.2.1 R(4)(a) is not an investment under CRED 7.2.1 R.

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CRED 8.2.6

The effect of CRED 8.2.5 R is that the maturity limits in CRED 7.2.2 R CRED 7.2.3 R do not apply to subordinated loans made by a credit union.

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CRED 8.3

Version 1 credit unions

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Requirement to maintain positive net worth

CRED 8.3.1

A version 1 credit union must at all times maintain a positive amount of capital.

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CRED 8.3.2

CRED 8.3.1 R means that the sum of the items set out at CRED 8.2.1 R(a)-(c) must produce a positive figure, so that a credit union's assets will at all times exceed its non-capital liabilities.

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CRED 8.3.3

CRED 8.3.1 R implements the principle that every pound saved by a depositor with a credit union should always be worth at least a pound.

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CRED 8.3.4

CRED 10.5.1 R and CRED 10.5.2 R mean that bad and doubtful debts must be taken into account in establishing whether a credit union is maintaining a positive amount of capital.

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Building reserves

CRED 8.3.5

A version 1 credit union must establish and maintain a general reserve.

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CRED 8.3.6

If, at the end of any year of account, the amount in its general reserve stands at less than 10% of its total assets, such a credit union must transfer to its general reserve at least 20% of its profits for that year (or such lesser sum as is required to bring the amount in its general reserve up to 10% of its total assets).

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CRED 8.3.7

For the purposes of CRED 8.3.5 R 'profits' means the profits resulting from the operations of a credit union in the year of account in question after deduction of all operating expenses (including payment of interest) and after making provision for the depreciation of assets, for tax liabilities and for bad and doubtful debts, but before the payment of any dividend.

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CRED 8.3.8

A credit union may not transfer from its general reserve where its general reserve stands at less than 10% of its total assets.

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Minimum initial capital

CRED 8.3.9

A version 1 credit union must have initial capital of at least £1,000.

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CRED 8.3.10

For the meaning of 'initial capital' see CRED 8.2.1 R (5) above.

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CRED 8.3.11

For the relationship between registration and authorisation see CRED 13.2.1 G. The purpose of CRED 8.3.9 R is to establish for these credit unions a minimum amount of capital at authorisation, out of which early expenses may be defrayed. It should be noted that the requirement in CRED 8.3.9 R does not affect a credit union's obligations to meet the other capital requirements that apply to it. The ability of a credit union to comply on a continuing basis with the other capital requirements that apply to it will be a central factor for consideration in any application for authorisation.

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Capital requirement for version 1 credit unions wishing to lend amounts of more than £7,500 in excess of the borrowing member's shareholding.

CRED 8.3.12

(1) A version 1 credit union must not make a loan of an amount greater than £7,500 in excess of the borrowing member's shareholding unless it has a capital to total assets ratio of at least 5%.
(2) A credit union which is owed by a member a total amount greater than £7,500 in excess of that member's shareholding must maintain at all times, while such an amount is outstanding, a capital to total assets ratio of at least 5%.

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CRED 8.3.12A

CRED 8.3.12 R (2) does not have the effect of invalidating existing loans if the capital to assets ratio falls below 5%.

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CRED 8.3.13

CRED 10.5.1 R and CRED 10.5.2 R mean that bad and doubtful debts must be taken into account in establishing the capital to assets ratio.

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Capital requirements for large version 1 credit unions

CRED 8.3.14

A version 1 credit union with total assets of more than £5 million or a total number of members of more than 5,000, or both, must maintain at all times a capital to total assets ratio of at least 5%.

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CRED 8.3.15

CRED 10.5.1 R and CRED 10.5.2 R mean that bad and doubtful debts must be taken into account in establishing the capital to assets ratio.

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CRED 8.3.16

(1) A version 1 credit union with total assets of more than £10 million or a total number of members of more than 10,000, or both, must maintain at all times a risk-adjusted capital to total assets ratio of at least 8%.
(2) 'Risk-adjusted capital' has the same meaning as in CRED 8.4.1 R CRED 8.4.2 R (Risk-adjusted capital requirements for version 2 credit unions).

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CRED 8.4

Version 2 credit unions

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CRED 8.4.1

(1) A version 2 credit union must maintain at all times a risk-adjusted capital to total assets ratio of at least 8% unless CRED 8.4.3 R applies.
(2) Risk-adjusted capital is calculated as follows:Capital + (provisions - balance of the net liability of borrowers where their loans are 12 months or more in arrears - 35% of the net liability of borrowers where their loans are 3-12 months in arrears).

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CRED 8.4.2

In calculating risk-adjusted capital:

(1) the maximum net figure for provisions (after deduction of the stipulated amounts for loans in arrears) that can be included is 1% of total assets;
(2) 'provisions' includes specific provisions and general provisions; and
(3) mortgage loans and provisions in respect of mortgage loans must not be included in calculating the loan balances to be deducted from, and the provisions to be added to, the amount of capital.

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Minimum initial capital

CRED 8.4.3

A version 2 credit union must have initial capital of at least £5,000.

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CRED 8.4.4

For the meaning of 'initial capital' see CRED 8.2.1 R (5).

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CRED 8.4.5

For the relationship between registration and authorisation see CRED 13.2.1 G. The purpose of CRED 8.4.3 R is to establish for these credit unions a minimum amount of capital at authorisation, out of which early expenses may be defrayed. It should be noted that the requirement in CRED 8.4.3 R does not affect a credit union's obligations to meet the other capital requirements that apply to it. The ability of a credit union to comply on a continuing basis with the other capital requirements that apply to it will be a central factor for consideration in any application for authorisation.

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