CREDS 5
Capital
CREDS 5.1
Application and purpose
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Application
CREDS 5.1.1
See Notes
This chapter applies to all credit unions except for CREDS 5.3, which applies only to version 1 credit unions, and CREDS 5.4, which applies only to version 2 credit unions.
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Purpose
CREDS 5.1.2
See Notes
This chapter 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 (see COND 2.4).
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CREDS 5.1.3
See Notes
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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CREDS 5.1.4
See Notes
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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CREDS 5.1.5
See Notes
The
FSA
may require a credit union to hold minimum amounts of capital greater than those set out in this chapter where it considers that particular circumstances make that appropriate.
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CREDS 5.1.6
See Notes
In addition to the capital requirements set out in this chapter, section 7A of the Credit Unions Act 1979 provides that a
credit union
may issue interest-bearing shares only if, among other things, its most recent year end balance sheet shows that it holds reserves of at least £50,000 or 5% of its total assets, whichever is greater.
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CREDS 5.2
Components of capital
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CREDS 5.2.1
See Notes
(1) The following are included in the meaning of 'capital' for the purposes of this chapter:
(a) audited reserves;
(b) interim net profits;
(c)
deferred shares;
(d) subordinated debt meeting the requirements set out at (4);
(e) initial capital; and
(f) revaluation reserves, arising from the differences between book values and the current market values of property fixed assets which:
(i) meet the requirements in (6) to (7); and
(ii) are subject to the limit in (8).
(2) Audited reserves are audited accumulated profits or losses, or both, retained by a credit union after payment of tax, dividends and interest on deposits. Reserves also include other realised gains and gifts of capital, for example from a sponsoring organisation. Deferred shares are included in the meaning of 'capital' but must not be counted twice in the calculation of capital. Where a credit union's audited reserves include sums, equal to the amount paid on deferred shares subscribed for in full, and transferred to the reserves in accordance with section 7(6) of the Credit Unions Act 1979, that amount must not also be counted separately under (1)(c).
(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. For this purpose, liabilities do not include the items set out in (1)(a) to (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 (6), and the limit in (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 or
SUP 16.12.5 R (see CREDS 8.2.3 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 (1)(a) to (e).
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CREDS 5.2.2
See Notes
The effect of CREDS 5.2.1 R (4)(a) is that the shortest permissible period for a subordinated loan qualifying as capital under CREDS 5.2.1 R (4)(a) is five years and one day.
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CREDS 5.2.3
See Notes
Subordinated debt is due and payable only in accordance with CREDS 5.2.1 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 (thereby giving the
FSA
the opportunity to raise objections to the proposed repayment). If repayment is proposed within the first five years, and the
FSA
considers that the remaining capital may not be adequate, then 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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CREDS 5.2.4
See Notes
The effect of CREDS 5.2.1 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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CREDS 5.2.5
See Notes
Negative reserves and any interim net losses must be deducted from capital.
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CREDS 5.2.6
See Notes
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 at CREDS 5.2.7 R.)
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CREDS 5.2.7
See Notes
Writing down subordinated loans over final four years
This table belongs to CREDS 5.2.6 R
This table belongs to CREDS 5.2.6 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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CREDS 5.2.8
See Notes
(1) When a credit union makes a subordinated loan to another credit union qualifying as capital under CREDS 5.2.1 R (4)(a), the full amount of the loan (not the amount counting towards the borrower's capital under CREDS 5.2.7 R) must be deducted from the lender's capital.
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CREDS 5.2.9
See Notes
The effect of CREDS 5.2.8 R is that the maturity limits in CREDS 3.2.2 R and CREDS 3.2.3 R do not apply to subordinated loans made by a credit union.
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CREDS 5.3
Version 1 credit unions
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Requirement to maintain capital assets ratio
CREDS 5.3.1
See Notes
A version 1 credit union must at all times maintain a capital-to-total assets ratio of at least 3%.
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Building reserves
CREDS 5.3.2
See Notes
A version 1 credit union must establish and maintain a general reserve.
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CREDS 5.3.3
See Notes
If, at the end of any year of account, the amount in its general reserve stands at less than 10% of its total assets, a version 1 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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CREDS 5.3.4
See Notes
For the purposes of CREDS 5.3.3 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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CREDS 5.3.5
See Notes
A version 1 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
CREDS 5.3.6
See Notes
A credit union must have adequate initial capital taking into account the nature, scale and complexity of its business and expected early expenses.
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CREDS 5.3.7
See Notes
(1) A version 1 credit union should have initial capital of at least £10,000.
(2) Contravention of (1) may be relied on as tending to establish contravention of CREDS 5.3.6 R.
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CREDS 5.3.8
See Notes
For the meaning of 'initial capital' see CREDS 5.2.1 R (5).
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CREDS 5.3.9
See Notes
It should be noted that the requirement in CREDS 5.3.6 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 certain version 1 credit unions
CREDS 5.3.10
See Notes
(1) A version 1 credit union must not lend to a member more than £7,500 in excess of the attached shares held by that member, 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 the attached shares held by that member 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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CREDS 5.3.11
See Notes
CREDS 5.3.10 R (2) does not have the effect of invalidating existing loans if the capital-to-assets ratio falls below 5%.
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CREDS 5.3.12
See Notes
CREDS 7.5.1 R and CREDS 7.5.2 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
CREDS 5.3.13
See Notes
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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CREDS 5.3.14
See Notes
CREDS 7.5.1 R and CREDS 7.5.2 R mean that bad and doubtful debts must be taken into account in establishing the capital-to-assets ratio.
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CREDS 5.3.15
See Notes
(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 CREDS 5.4.1 R and CREDS 5.4.2 R (Risk-adjusted capital requirements for version 2 credit unions).
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CREDS 5.4
Version 2 credit unions
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CREDS 5.4.1
See Notes
(1) A version 2 credit union must maintain at all times a risk-adjusted capital-to-total assets ratio of at least 8%.
(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 to 12 months in arrears).
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CREDS 5.4.2
See Notes
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
CREDS 5.4.3
See Notes
A credit union must have adequate initial capital taking into account the nature, scale and complexity of its business and expected early expenses.
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CREDS 5.4.4
See Notes
(1) A version 2 credit union should have initial capital of at least £50,000.
(2) Contravention of (1) may be relied on as tending to establish contravention of CREDS 5.4.3 R.
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CREDS 5.4.5
See Notes
For the meaning of 'initial capital' see CREDS 5.2.1 R (5).
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CREDS 5.4.6
See Notes
It should be noted that the requirement in CREDS 5.4.3 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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