On the 30th September 2018 the capital requirement for large Credit Unions increased with the introduction of the 2% capital buffer. This represents a major increase in the capital requirements for large Credit Unions. The new limits apply to Credit Unions:
- over £10m in assets or
- more than 15,000 members or
those carrying out any of the additional activities of additional lending, additional investments or mortgages.
Problems with the Ratio
There are a number of successful and profitable Credit Unions that will have issues in meeting the new buffer. For growing credit unions in particular it is a difficult hurdle to achieve. During periods of growth assets usually grow faster than capital. Many Credit Unions have also highlighted that the current ratio strangles growth. This impacts their ability to get the size and level of profitability that they require.
Basing the capital requirement on the total level of assets does not take into account that a large proportion of these funds are often distributed between banks. These funds have a lower level of risk that funds lent out to members. The current ratio does not take into account the differing level of risk.
It should also be remembered that the top capital tier has been based on £10 million of assets (as well as member numbers) for a long time. That level should have increased by inflation which would have made a significant difference to when it applies to Credit Unions.
The level and way the ratio is calculated has been the subject of criticism. Recently Bim Afolami MP, All-Party Parliamentary Group (APPG) called on the Government to support credit union expansion by reviewing capital requirements.
Options available to increase capital
In the meantime large Credit Unions with a capital ratio between 8%-10% are working to meet the new requirements. Increasing your capital ratio in the short term can be very difficult. While hopefully the requirements will be revised in the meantime the main options available to Credit Unions in this position are:
- Restricting Shares– Unfortunately the main short term measure can be restricting shares and juvenile deposits. It reduces assets and therefore can improve the ratio. The problem with the capital ratio is it does punish credit unions for achieving one of their key objectives in providing savings facilities. This conflicts with local and national governments pushing Credit Unions as a way for people to save.
- Subordinated Loans– Subordinated loans can be an effective short-term measure to boost capital if you can find a body willing to provide the facility. If you use this route please check the agreement complies with the requirements of the PRA rulebook.
- Deferred Shares– While deferred shares can boost capital; the complexities on deferred share and their restrictions mean they are very rare.
- Grants– Grants from bodies such as the Lloyds Banking Group Credit Union Development Fund have provided a boost for many Credit Union’s capital ratios.
- Revaluation– Revaluing owned property can provide a boost to your capital to asset ratio if the value has increased. This route does lead to actual costs as you need regular revaluations to meet the requirements. The PRA rulebook contains restrictions on the level of revaluation reserves that count towards your capital. It is therefore worth speaking to your auditors first to discuss the issues.
- Improving profitability– The best solution can be to improve profitability but it does take time. In addition, for many costs can not be cut further without jeopardising member service.
If you are failing to meet the new capital requirement then liaising with the regulator. They will want to know that you have identified the issues and have a plan to resolve the matters as soon as possible.