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Application provision

1.1 Unless otherwise stated, this Part applies to a credit union.



A credit union must have adequate capital taking into account the nature, scale and complexity of its business.



For the purposes of this Chapter,

  1. (1) capital comprises the following items:
    1. (a) audited reserves;
    2. (b) interim net profits;
    3. (c) deferred shares;
    4. (d) subordinated debt that meets the requirements set out at (5); and
    5. (e) revaluation reserves, arising from the differences between book values and the current market values of property fixed assets that meet the requirements in (6) and (7) and are subject to the limit in 8.3.
  2. (2) audited reserves are audited accumulated profits or losses, or both, retained by a credit union after payment of tax, dividends and interest on deposits and include other realised gains and gifts of capital. Deferred shares are included in the definition, but must not be counted twice in the calculation, of ‘capital’. Where a credit union's audited reserves include sums equal to the amount paid on deferred share subscribed for in full and transferred to reserves in accordance with section 7(6) of the Credit Unions Act 1979, that amount must not also be counted separately under (1)(c).
  3. (3) profits means the profits resulting from the operations of a credit union in the year of account in question after deduction of all operating expenses, including payment of interest, and after making provision for the depreciation of assets, tax liabilities and bad debt, but before the payment of any dividend.
  4. (4) interim net profits are interim profits net of tax and anticipated dividends (any interim losses must be deducted from capital).
  5. (5) to be included in the calculation of capital, subordinated debt must meet the following conditions:
    1. (a) the maturity of the loan must be more than five years from the date on which the loan is made;
    2. (b) the subordination provisions provide that the claims of the subordinated creditors rank behind those of all unsubordinated creditors including the credit union's shareholders;
    3. (c) to the fullest extent possible, creditors waive their rights to set off amounts they owe the credit union against subordinated amounts owed to them by the credit union;
    4. (d) the only events of default are non-payment of any interest or principal under the debt agreement or the winding-up of the credit union;
    5. (e) the remedies available to the subordinated creditor in the event of default in respect of the subordinated debt are limited to petitioning for the winding up of the credit union or proving for and claiming in the liquidation of the credit union;
    6. (f) the subordinated debt must not become due and payable before its stated final maturity date except on an event of default complying with (d);
    7. (g) the terms of the subordinated debt must be set out in a written agreement or instrument that contains terms that provide for the above conditions; and
    8. (h) the debt must be unsecured and fully paid up.
  6. (6) to be included in the calculation of capital, revaluation reserves must meet the following conditions:
    1. (a) the credit union must apply the revaluation method to all of its property fixed assets and not selectively;
    2. (b) the values must result from professional valuations of each property;
    3. (c) no professional valuation of a property can be more than five years old and, in the intervening year or years in which a property is not professionally valued, the governing body must have undertaken an interpolation of value which takes into account any decline in property values disclosed by valuations of other properties in that year or those years; and
    4. (d) any increase of revaluation reserve must be supported by a professional valuation.
  7. (7) subject to the conditions in (6), and the limit in 8.3, the amount of revaluation reserve used for the calculation of capital must be the lesser of:
    1. (a) the amount standing to the credit of any such reserve in the balance sheet in the most recent annual return to have been sent to the PRA as may be required by the PRA under rules; and
    2. (b) the amount of any such reserve in the accounting records of the credit union.



The amount of revaluation reserve that a credit union is permitted to include in the calculation of its capital must not exceed 25% of the credit union’s capital.



The amount of any subordinated loan that qualifies as capital must, over its final four years to maturity or, where the subordinated loan requires repayment in tranches, over the final four years to maturity of each tranche, be written down by a credit union by 20% of the amount of the loan or tranche per year.



credit union must have:

  1. (1) subject to (2), capital of at least 3% of total assets;
  2. (2) subject to (3), capital of at least 5% of total assets, if that credit union has total assets of more than £5 million or more than 5,000 members;
  3. (3) capital of at least 8% of total assets and a capital buffer at least equal to a further 2% of total assets, save in the event of a stress scenario in which case such buffer may be employed to absorb losses, if that credit union has total assets of more than £10 million, more than 15,000 members or undertakes an additional activity other than the additional activity of providing transactional accounts.



A credit union must notify the PRA immediately if its capital is below the relevant minimum threshold stipulated in 8.5.



In the event that a credit union employs its capital buffer in a stress scenario it must plan for the restoration of its capital buffer to the level stipulated in 8.5 within a reasonable period.



If, at the end of any year of account, the amount of its capital is less than 10% of its total assets, a credit union must transfer to its general reserve at least 20% of its profits for that year (or such lesser sum as is required to bring the amount in its capital up to 10% of its total assets).



A credit union must not make a transfer from its general reserve if its capital is equal to an amount that is less than 10% of total assets or if as a result of such a transfer its capital would be reduced to an amount that is less than 10% of total assets.