Bank of Lithuania
2018-01-02
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The turn of the year marks an important event for Lithuania’s financial market – the end of the credit union reform. From now on, two central credit unions will operate in Lithuania; another five credit unions will undergo the procedures of restructuring into specialised banks.

‘It can be stated that the restructuring of credit union activities has been completed. It has enabled formation of groups of central credit unions that will be able to strengthen cooperative banking activities, develop provision of financial services to households in regions, towns and cities, as well as businesses. The possibility to establish specialised banks will add up to the map of credit institutions, the range of financial services available to consumers, and will increase competition,’ says Gediminas Šimkus, Director of the Economics and Financial Stability Service at the Bank of Lithuania.   

He notes that, within the reformed system, the role of central credit unions has become much more significant than before: they have been provided with possibilities to ensure the solvency of their members and empowered to control the level of risk assumed by them.   

Credit unions had to make up their mind: to continue carrying out credit union activities joining a central credit union or start the procedure of restructuring into a bank. 

It is planned that the Lithuanian Central Credit Union, which has preserved the core of previously the sole central credit union, will unite 50, and the established new United Central Credit Union – 11 credit unions, uniting over 140 thousand members both.  

Mano unija, LTL, Saulėgrąža, Rato and Taupa credit unions have decided to move on the path of traditional banking and got permission from the Bank of Lithuania to be restructured into a specialised bank. While that does not mean that these institutions will automatically become banks, a path has been opened for them within five years to reorganise their activities so as to satisfy all requirements set for banks and get a licence of a specialised bank. That would allow them to engage in traditional banking activities – collect deposits, lend to households and businesses.

‘The need for a credit union sector reform was caused by too great a deviation of credit unions from the cooperative activity model and related issues. The reform has enabled credit unions to ‘look into the mirror’ and answer the question if they had really acted as financial institutions based on cooperative principles, uniting a certain community. In order for them not to inherit the issues accumulated within the previous system, their balances have been checked thoroughly during an asset quality review and cleaned from poor quality assets,’ says Šimkus.

The credit union reform was basically stimulated by the fact that, after more than 20 years in operation, this sector did not turn to profit, the model of its operation did not conform to the cooperative one, and they lacked sustainable capital. Acting similar to banks and investment funds, credit unions could assume excessive risk and as often as not would go bankrupt (from 2013 to the end of 2017, 11 credit unions were obliged to terminate operation on a compulsory basis, while the operations of another two suspended and a temporary administrator was appointed). There have also been malevolent persons who would waste assets intentionally and reduce credit unions to bankruptcy. Due to all that, EUR 173 million in claims was paid from the Deposit Insurance Fund.

While implementing the reform, asset quality review was carried out in all credit unions. Due to issues that were revealed during asset quality review, credit union asset value was reduced by EUR 15.9 million. Credit union sector assets amounted to EUR 666 million, or 2.5 per cent of the financial sector’s total assets in the third quarter of 2017.