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The Bank of Lithuania undertakes the strengthening of credit unions supervision and their risk management

March 9, 2012

The Board of the Bank of Lithuania approved the Directions of improvement of the credit union activity supervision, which would strengthen credit unions supervision and tighten capital and other requirements. In addition to other requirements, qualification examinations for credit union management are planned. A possibility is also considered to obligate credit unions that reach certain operation volumes to reorganise themselves into banks. These and other proposals will be discussed with the organisations that represent and supervise unions.

“Recently, credit unions have been increasing their liabilities and expanding loan volumes especially fast by attracting deposits for higher interest. In order to create an alternative to the users of financial services and to compete with banks, unions also assume relatively high risks. Therefore, we initiate amendments to the legislation, which will enable a stricter control of the credit unions operation and expansion”, said Mr. Vytautas Valvonis, Director of the Supervision Service of the Bank of Lithuania.

According to him, to ensure safe and reliable operation, credit unions supervision will be strengthened in a complex way – by improving credit union management, strengthening the capital base and establishing stricter requirements for the management and control of the key risks.

According to the credit union activity supervision guidelines, it is proposed to set stricter requirements for the establishment of credit unions – to increase the mandatory share capital of a union and the minimum number of credit union members. The increase of the requirement for the minimum equity capital of a credit union is also proposed for the currently operating credit unions.

In order to strengthen risk management efficiency, it is proposed to tighten the requirements for individual risks, especially credit risk, related to the crediting of legal entities. It is also planned to start the application of an additional prudential requirement on liquidity – the liquidity buffer requirement for covering the net financing gap.

In order to increase the level of credit union management quality, preparation of the rules for the qualification examinations of the persons applying to become heads of credit unions and creation of the standing commission for the evaluation of qualification and experience are under consideration.

The requirement for smaller credit unions to have a standing internal audit service as well is envisaged.

To ensure higher transparency of the credit unions activity, it is proposed to obligate credit unions to create conditions for current and potential union members to get acquainted with the performance results of unions in publicly available information sources. It will be also sought to ensure that the decisions are taken in meetings with the participation of a higher number of members.

One of the directions for the strengthening of credit unions supervision is a larger set of enforcement measures. Additional measures under consideration include the possibility to appoint a temporary representative to supervise the credit union’s activity, to increase fines imposed for the violations of the credit union activity requirements.

According to the Bank of Lithuania, during the further stage of credit union activity supervision improvement, a wider role of the Central Credit Union of Lithuania in the supervision of credit unions in the future should be discussed.

In addition, it is proposed to provide in the legal acts a certain limit of growth of credit unions, after which they had to reorganise themselves into banks.

“After credit unions reach a certain operation volume and their systemic significance increases, supervisory requirements should be tightened accordingly. Thus, we would avoid the situation, when unions, even after becoming larger than banks, are still subject to much softer supervisory regime according to the legal acts”, said Vytautas Valvonis.

To implement these and other measures proposed in the Directions of improvement of the credit union activity supervision, the Bank of Lithuania will initiate amendments to the Law on Credit Unions, the Law on the Central Credit Union of the Republic of Lithuania and some other legal acts; it is also planned to prepare new legal acts.

The Bank of Lithuania plans to coordinate the directions of improvement of the credit union activity supervision and the proposed legislative amendments with the Central Credit Union of Lithuania, which includes 62 credit unions, and the associations Lietuvos kredito unijos (Lithuanian credit unions) and Lietuvos kreditas (Lithuanian credit). In the beginning of this year, 74 credit unions had operating licences, with the total membership of over 128 thousand.