2012-08-08
Strong expansion in credit union activities to be subject to tighter supervision
At the end of the second quarter of this year, the amount of deposits accepted by domestic credit unions surged by a third year on year, with the assets growing at a similar rate. To ensure sustainability and responsibility in the development of this financial sector, the Bank of Lithuania is going to further tighten supervision of credit union activities.
According to the data of the Bank of Lithuania, the assets of the 75 credit unions operating in Lithuania amounted to LTL 1.84 billion as at 1 July 2012, up by 30.2 per cent year on year. This strong growth was driven basically by a 32.4 per cent rise – to nearly LTL 1.6 billion in the amount of deposits, which mainly consists of deposits of natural persons.
“Such a sharp jump in deposits and assets reminds of the unsustainable growth of banks in 2005–2007, and raises concerns whether credit unions will manage to adequately handle all strong expansion related risks. Therefore, we will inevitably enhance supervision of credit unions and proceed with the tightening of requirements for unions and their executives undertaken back in early this year”, Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania, said.
According to him, credit unions’ risk appetite increases because of the fact that, competing for deposits, credit unions offer substantially higher interest rates and, therefore, to avoid operating at a loss, they invest attracted funds in a more risky manner.
Based on credit unions’ presented financial accounts, their profits earned amounted to LTL 5.5 million in the first half of 2012, yet 33 credit unions operated at a loss, which was LTL 8 million. The overall operating performance for the first half of 2012 is a loss of LTL 2.5 million, down from a profit of LTL 0.3 million year on year.
According to the report data presented on 1 July 2012, the capital adequacy ratio of the system of credit unions increased slightly in the reference quarter and stood at 20.16 per cent (the ratio is 13%). The liquidity ratio of the system of credit unions was 50.01 per cent, yet that of some credit unions stood close to the minimum requirement (30%).
While the data presented by credit unions suggests that loan quality improved in the second quarter of this year, the Bank of Lithuania’s available data enables assuming that this was in part driven also by the insufficiently conservative assessment of the risk of granted loans.
With the aim that credit unions are more conservative in assessing their credit risk, the Bank of Lithuania is going to tighten the loan assessment requirements (making of specific provisions) shortly. Requirements for credit union liquidity, internal control, identification and management of the operational and other risks will be tightened in the near future as well.
To enhance credit union management quality, the Supervision Service of the Bank of Lithuania has already prepared and agreed with market participants tighter requirements for the qualifications of credit union executives and also established the rules for their examination.
With growth in the assets of credit unions, not only the concentration of loans but that of holdings of funds with banks can be seen; thus the Bank of Lithuania has updated and agreed with market participants the Rules for the Calculation of Maximum Exposure and Large Exposure of Credit Unions. To minimize concentration risk, the Rules also provide for application of the maximum exposure requirement to credit union funds held with banks.
Moreover, the Bank of Lithuania has initiated amendments to the Law on Credit Unions, by which it is proposed to substantially increase minimum requirements for a union’s own capital, share contributions, and minimum membership. The amendments to the Law would also raise fines for violations of prudential legal acts, provide a possibility to appoint a temporary representative for supervisory activities to a union’s governing bodies; they are also to halve the limits to assets after exceeding which the union will have to establish an internal audit service operating on an ongoing basis. These and other new requirements, which are aimed at sound activities of credit unions, are expected to be discussed during the Seimas’ autumn session already.