2017-04-25
Moving into another phase of reform, credit unions rapidly enhance quality of capital
As the Bank of Lithuania, together with external auditors, finished an asset quality review, credit unions significantly accelerated pooling of sustainable capital. The absolute majority of credit unions agreed with the publication of the results of the asset quality review – as many as 69 out of 72 credit unions, including the Lithuanian Central Credit Union, gave their permission.
‘Publicity of results ensures transparency of the entire process, its further success, and shows confidence in the great work done. The asset quality review revealed that most credit unions were pooling sustainable capital and took other actions to strengthen their capital; therefore, the reports submitted as of 1 January and the first quarter in many cases reflected reasonably better capital ratios than were established in July last year. Recognition of the results of the asset quality review of a large part of credit unions has been completed; with some of them the process is being continued due to some degree of provisions requirement,’ said Vytautas Valvonis, Director of the Supervision Service of the Bank of Lithuania.
According to him, the reform of the system has now shifted to another phase, during which each participant will, by 1 January 2018, have to make up their mind on which central credit union to join or decide to become a specialised bank. The asset quality review conducted by external auditors ensures that the on-balance-sheet value of credit unions is recorded properly, which increases mutual confidence of these institutions and provides conditions to engage in cooperation-based activities as members of central credit unions. This will strengthen the entire sector, help it to compete with commercial banks and also provide credit to small and midsized business.
According to the results of the asset quality review conducted in mid-2016, an additional capital requirement was identified for 28 credit unions. However, the submitted financial statements as of 31 March 2017 suggest that great progress was made and only 6 out of 71 credit unions did not meet the currently applicable capital adequacy requirement of 13 per cent.
As restructuring gains pace, credit unions will have to further increase sustainable capital. In view of the fact that implementation of the reform provided for by current laws mitigates risks arising within this sector, last week the Board of the Bank of Lithuania approved amendments to the capital requirements. They will provide conditions for faster accumulation of sustainable capital. Hence, even those credit unions which, as reflected in the reports submitted by them, still lack additional capital will have time to pool it.
The results of the asset quality review for specific credit unions are available on the website (140 KB download icon) of the Bank of Lithuania. Information on the state of the capital of credit unions is also presented, which they provided in their latest financial statements. Credit unions with which the process concerning provisions or review of the shares of the Lithuanian Central Credit Union will be continued are also indicated.
‘For some credit unions there remains very little to do before the results of their asset quality review are recognised, i.e. to only agree with the Bank of Lithuania on a few loans or small amounts of additionally calculated provisions identified during the asset quality review. Therefore we urge all credit unions to finalise the agreement process as soon as possible so that information about it is made public and no doubts arise over the correctness of the capital adequacy ratio,’ Valvonis claimed.
The asset quality review was one of the major steps in carrying out the restructuring of the system of credit unions, the main purpose of which is ensuring the sector’s sustainable development. The reform is based on several major pillars:
- clearly defined business mission – credit unions are provided conditions to focus on their main activity, i.e. member crediting;
- strong capital – the existing regulation of credit union capital is being changed essentially. Capital unstable and insufficient for covering losses is being replaced with sustainable capital of credit unions, thereby ensuring credit union stability;
- framework for ensuring solvency – clearly and unambiguously defined activities of stabilisation (solvency) funds managed by central credit unions and their use in aiding credit unions facing difficulties. This way the system of credit unions is protected from single bankruptcies of credit unions;
- cooperation and integration – mandatory credit union membership of central credit unions is being established, thereby ensuring integration of the entire sector of credit unions. The arising opportunity for several central credit unions to operate together ensures that credit unions may operate with those partners that share a common vision of the business trend, are able to develop a business model common for all members. This would allow achieving real, non-declaratory collaboration and cooperation, as well as business efficiency and benefits for members of credit unions;
- self-regulation – credit unions, operating under the ‘umbrella’ of a central credit union, agree on common rules and stick to them, thereby limiting the risk assumed by the entire system of credit unions. The supervisory model of the activities of credit unions is being enhanced, as the Bank of Lithuania supervises both individual credit unions and the consolidated system of central credit unions.
2017 is a transition period during which credit unions must prepare for the entry into force of the provisions of all of the laws implementing the reform of the credit union sector as of 1 January 2018.