2012-10-19
With the aim of improving the safety of credit union deposits, the Bank of Lithuania decided to apply a new liquidity requirement – liquidity coverage ratio – to credit unions. Unions will be subject to this requirement from the beginning of next year.
“The aim of this ratio is to ensure that credit unions always hold a certain amount of high-quality liquid assets which could be immediately converted to cash should an unfavourable situation occur. This would enable credit unions to satisfy additional demand for cash for a period of one month without attracting any additional cash flows and avoiding a necessity to sell other assets at a loss,” Vytautas Valvonis, Director of the Supervision Service of the Bank of Lithuania, explained.
According to him, the majority of credit unions currently are not facing liquidity problems, however, the new safeguard would help avoiding problems should they occur in the future because of buoyant development of credit unions and related liquidity risk.
“The liquidity coverage ratio requirement will oblige credit unions to more precisely forecast cash flows and will act as a safety cushion which would protect in case of financial problems. We will demand that the new requirement is observed on a daily basis,” said Vytautas Valvonis.
It has been established that only high-quality liquid assets would be included in the calculation of the ratio, such as cash, securities issued by governments and banks of the European Economic Area countries, if these countries had been assigned at least AA- or Aa3 credit ratings by Standard & Poor’s, Fitch Ratings or Moody’s InvestorsService. Fifty per cent of a credit union’s funds held in the liquidity support reserve of the Central Credit Union of Lithuania will also be recognised as high-quality liquid assets. The amount of high-quality liquid assets shall not be smaller than the net flow of the cash which is being lost.
Based on the data as at 1 July 2012, all credit unions would comply with the liquidity coverage ratio but some of them with only a little reserve.
A similar – liquidity buffer – requirement began to be applied to banks already in 2010.
In March this year, the Board of the Bank of Lithuania approved The Provisions for the Trends of Enhancement of the Supervision of Credit Union Activities. When implementing them, supervision of credit unions is strengthened, capital and other requirements are tightened, and the qualification level required from chief executive officers of credit unions has been raised.
Currently, the Central Credit Union of Lithuania and 77 credit unions are operating in Lithuania. They unite about 141 thousand members.