Credit unions sector developments and supervision. June 2013

Transcription

1 Credit unions sector developments and supervision June 2013

2 Contents Overview of Credit Unions sector Problems Regulatory measures 2

3 Supervised market participants (End of 2012) Supervised market participans Assets (LTL million) Numger of market participants Banks and Foreign bank branches* Leasing companies Pension funds Insurers and branches of EEA insurers Credit unions and LCCU Foreign collective investment undertakings Collective investment undertakings Management companies Insurance broker companies Financial brokerage companies Payment institutions - 28 Electronic money institutions - 2 AB NASDAQ OMX Vilnius - 1 Central securities depository - 1 Issuers whose securities are traded in regulated markets - 32 Issuers whose securities are not traded in regulated markets - 7 Financial advisor companies - 6 Consumer credit companies (excluding credit institutions) - 62 Total * Excluding AB Ūkio bankas 3

4 Structure of the financial system assets Note. Credit unions constitutes only a marginal share in financial system assets of Lithuania 4

5 Largest share of financial sector assets belongs to banks Number of participants in banking sector: 7 banks 9 foreign bank branches 2 foreign banks representative offices 266 notifications about services without branch Market shares Scandinavian banks are dominant in the market (market share approx. 89 percent) Danske 6,1% Citadele 1,2% Local banks (Siauliu, Medicinos, Finasta) 8,7% Assets Other foreign banks branches 1,6% Swedbank 25,8% Nordea 12,1% DNB 14,9% SEB 29,6% 5

6 Origins of CU in the World The idea of credit union was born in southern Germany in the middle of nineteenth century. The first financial cooperative was formed in Hedersdorff (Germany) in It was founded by the mayor of the town R.W.Raiffeisen. In the second half of the nineteenth century the idea of credit unions has spread rapidly in Germany and other Western European countries. In F. Raiffeisens idea reached North America - Alphonse Desjardins established the first credit union in Canada (Quebec). The first credit union - St. Mary's Bank - was established in

7 Origins of CU in Lithuania The first credit union in Lithuania was established in 1871 in the little town called Paberžė. In interwar period there were 310 credit unions in Lithuania, united by 119 thousand of members. After adoption of the Law on Credit Unions in 1995, credit unions started establishing in Lithuania. The first credit union was registered in 1995, it was called Vievio taupa. The first wave of credit unions establishment was being observed in (10 credit unions per year). After the entry into force the new version of the Law on Credit Unions in 2002, 13 credit unions has also been established. Since 2011 the establishment of the new credit unions was being observed again (6 credit unions started its activities). 7

8 CU in Lithuania The Law on Co-operative Societies stipulates that Co-operation means the mobilisation of activities and resources laid down in law and aimed at achieving the common goals of members. Co-operative societies may be established for this purpose. A Credit union is a cooperative society, operating under the Law on Credit Unions. It means a credit institution satisfying the economic and social needs of its members. Credit union members constitute a common savings fund and provides loans to each other. The credit union is united and democratically managed by its members. Under the Law on Credit Unions implemented in 1995, the members of credit union could be united by the work in the same institution, professional togetherness, belonging to a certain formal compound persons, living in the same residence. According to the Law on Credit Unions which came into force in January, 2009, only the territorial principle of membership was left. For example.: at the end of 2012, there were 11 credit unions in Vilnius with assets amounted to 35.4 percent of all credit union system assets. 8

9 The main requirements for CU A credit union has the right to provide financial services for: 1) Members of the credit union and associate members of the credit union; 2) Associations of credit unions; 3) Credit unions; 4) The Central Credit Union (CCU). The share capital of a credit union consists of the value of all share contributions of the credit union. Minimum of share contribution can t be less than 100 LTL. The smallest number of members of a credit union, excluding associates, is 50. Minimum capital requirement is no less than LTL; If credit union intends to provide electronic money service, capital should not be less than EUR. 9

10 Members of CU A Credit union has two types of members: Legally capable natural persons having a voting right, having a permanent place of residence in the Republic of Lithuania. A natural person may be a member of a credit union where he resides, is employed or studies within the territory of a municipality of the Republic of Lithuania where the registered office of the credit union is located and within the territory of other municipalities indicated in the articles of association of the credit union and bordering on this municipality. Associate members, who don t have a voting right and can t participate in the decision-making, may include the following entities: 1) associations, trade unions, religious communities and societies, gardeners societies, associations of multi-family apartment house owners, public establishments wherein no holdings are held by state institutions, cooperative societies (cooperatives) and agricultural companies; 2) individual enterprises of natural persons who are members of the credit union, the private limited liability companies in which a member or members of the credit union hold a proportion of the authorised capital and/or voting rights granting the right to control the activities. The legal persons indicated in this subparagraph may be associate members of the credit union if they conform to the definition of small and micro enterprises. 10

11 Dynamics of CU number

12 LCCU Lithuanian Central Credit Union (LCCU) - credit institution established in 2002, it currently has 63 members (credit unions). LCCU main function is to assure liquidity and solvency for its members (credit unions) and to maintain credit unions system stability. At this aim, LCCU has formed the Liquidity maintenance reserve and the Stabilization fund. If necessary, these reserves may be directed to the members of LCCU liquidity and solvency support. The amount of funds accumulated in the Liquidity maintenance reserve and the Stabilization fund is insufficient to solve the larger CU system problems. Minimum LCCU capital may not be less than 1 million EUR. LCCU capital is formed by share contributions (primary and additional). Minimum of LCCU member's primary share contribution is 1000 LTL. A member can have only one primary share contribution. 12

13 Dynamics of CU members Thousands Credit unions' members Note. Credit unions members include natural persons (members) and legal persons (associate members) 13

14 Dynamics of CU Assets and Deposits , ,89 596,1 794,8 1,11 773,8 932,9 1, ,5 1276,9 2, ,8 1628, ,8 2,5 2 1,5 1 0, Deposits (LTL million) Assets (LTL million) Market share of banking assets 0 Note. According to 1st quarter data, 2013, because of 2 CU bankruptcies, CU Assets 1,3%, Deposits 2,3%, market share of banking assets remained the same. 14

15 Structure of CU Assets 7% 19% Loans granted 52% Investments in securities 22% Deposits in banks and CCU Other assets 15

16 Structure of CU Loan Portfolio 100% 90% 80% 6,2 11,1 18,3 24,4 34,1 70% 60% 50% 40% 30% 20% 10% 0% 93,8 88,9 81,7 75,6 65, Share of loans for legal persons Share of loans for natural persons Note. Most of the loans granted to associate members (legal persons) are from credit unions of major cities 16

17 Quality of CU Loan Portfolio Percentage ,9 17, ,56 7,53 6, ,42 1,85 2, Non-performing loans / granted loans Specific provisions for granted loans / granted loans CU system Banking system Non-performing loans / granted loans 17,06 13,1 Specific provisions for granted loans / granted loans 6,7 5,3 Note. During the 1st quarter, 2013, the quality of CU loan portfolio rose: Non-performing loans / granted loans stood at 15,3%, Specific provisions for granted loans / granted loans - 3%. 17

18 Structure of CU Liabilities 2% 1% 1% Deposits Liabilities to Banks and CCU Subordinated loans 96% Other liabilities 18

19 Dynamics of CU Share Capital Million LTL 236,2 177,8 135,8 92,5 107, Share capital Note. The major part of share capital is formed by borrowers, because according to the Law on Credit Unions, the amount lent to a single member of a credit union may not exceed tenfold the amount of that member s share contribution and 10 per cent of the deposits held with the credit union and the amount of the loans undertaken by the credit union. 19

20 Prudential requirements for CU Capital adequacy ratio 13% Liquidity ratio 30% Liquidity coverage ratio Maximum exposure to a single borrower ratio 25% The overall ratio of maximum open position in foreign currency 25% 20

21 Prudential Ratio: Capital Adequacy Percentage 25,0 20,0 16,8 18,6 20,2 19,8 16,5 15,0 10,0 5,0 0, Capital Adequacy Note. According to 1st quarter data, 2013, capital adequacy ratio was 19,7%. 21

22 Prudential Ratio: Liquidity Percentage 50,0 48,0 48,7 48,9 46,0 44,0 44,8 42,0 42,0 42,2 40,0 38, Liquidity Note. According to 1st quarter data, 2013, liquidity ratio was 52,5%. 22

23 Profit (Loss) of the CU sector LTL thousands , , , , Note. During the 1st quarter, 2013, the CU sector result was loss of more than 11 million LTL. 23

24 The main problems of CU sector (I)! Co-operation means mobilisation of activities and resources laid down in law and aimed at achieving the common goals of members.! CU, established in major cities, characterized by high growth rates, are loosing mutual trust principles. THE CLASSICAL PRINCIPLE OF CO-OPERATION IS MOVING AWAY 24

25 The main problems of CU sector (II)! The rapid growth of CU was caused by paying higher interest rates than banks to the deposits of CU members.! Rapid growth of some CU s deposits and assets is a concern whether the CU will be able to properly manage all of the risks associated to a sharp expansion. THE SHARP GROWTH IN DEPOSITS AND ASSETS 25

26 The main problems of CU sector (III)! The loans granted to associate members (legal entities) are rapidly growing in the loan portfolios of CU. These loans are more risky.! During the inspections of several CU it was discovered that some of the CU carries irresponsible lending policies. IRRESPONSIBLE LENDING POLICIES (THE GROWTH OF LOANS FOR LEGAL ENTITIES) 26

27 The main problems of CU sector (IV)! The CU business model itself programmed some of the problems, because there are many CU owners (members), but no one to take the responsibility for the CU.! CU which are members of LCCU may still get some help from Stabilization Fund, but the amount of fund is insufficient for larger CU s system problems. LIMITED ABILITY TO RAISE CAPITAL 27

28 The main problems of CU sector (V)! The depositors of CU don t even try to assess the risk themselves that in the case of CU s bankruptcy they lose money because they suffer the least (they lose only LTL 100 if the deposits are less than EUR ). THE FACTOR OF "MORAL HAZARD" 28

29 Regulatory measures INTENSIFIED SUPERVISION IMPRO-VEME NT OF LEGAL FRAMEWORK STRICTER PRUDENTIAL REQUIREMENTS 29

30 Intensified Supervision The credit union's performance analysis is being prepared regularly each quarter (according to the financial statements and the maintenance of the Loan Risk Database and other information) and intensified supervision of credit unions is being applied on daily basis. If there is a major problem, credit union is being inspected. Priority is given to systemically important (largest) and the high risk credit unions. After the inspections, if it is noticed that the credit union does not comply with legal requirements and the principles of the safe and reliable activities, it is subject to sanctions fines, suspension of management, lending limits, or other instructions to remedy the situation. If it is determined that there is a threat to business continuity and union s management does not take real action, the Bank of Lithuania has a right to impose the most severe sanctions a restriction (moratorium) on activities, a revocation of the license issued. 30

31 Improvement of the Legal Framework In March, 2012 the Bank of Lithuania approved the Directions of improvement of the CU activity supervision. The Bank of Lithuania revised and implemented a number of resolutions in order to improve supervision and risk management of CU. In March of 2013, the Minister of Finance set up the regulatory working group in order to improve and prepare draft legislation for CU. 31

32 Stricter prudential requirements (I) Differentiated liquidity ratio will be applied for credit unions, which deposit growth exceeds sustainable growth. Credit unions with assets less than 15 million LTL or an annual growth of deposits up to 15 percent (inclusive) not less than 30 percent. Credit unions with assets of over 15 million LTL and an annual growth of deposits range from 15 to 25 percent (inclusive) not less than 40 percent. Credit unions with assets of over 15 million LTL and an annual growth of deposits range from 25 to 50 percent (inclusive) not less than 50 percent. Credit unions with assets of over 15 million LTL and an annual deposit growth rate of more than 50 percent not less than 60 percent. The new liquidity coverage ratio requirement. It 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. 32

33 Stricter prudential requirements (II) Differentiated capital adequacy ratio will be applied to credit unions, which have a large amount of loans granted to associate members (legal persons): Credit unions, which provided loans to associate members, except for loans granted to associations, trade unions, religious communities, associations, communities, gardeners, home owners associations (hereinafter associate members), up to 20 percent (inclusive) of the total loans granted - not less than 13 percent; Credit unions, which provided loans to associate members range from 20 to 40 percent (inclusive) of the total loans - not less than 18 percent; Credit unions, which provided loans to associate members are more than 40 percent of all loans up to 31 December, 2013 not less than 20 percent, since 1 January, 2014 not less than 25 percent. Tightened maximum exposure to a single borrower ratio - the amount of credit to one borrower may not exceed the lesser of the following amounts: 25 percent of credit unions capital; LTL. 33

34 Stricter prudential requirements (III) The New Rules for Issuing Permissions to Become Credit Union Managers The stricter qualification and experience requirements to credit union managers. The exams. Credit union managers whose qualification raise doubts or candidates to such positions who do not comply with the established minimum requirements will need to pass a special exam. The new Requirements on public disclosure The Obligation for credit unions to disclose financial statements to the public. This requirement was implemented in order to increase the transparency of credit unions and to give more sufficient information about their activities for public. In order to limit the concentration risk of credit unions, the Bank of Lithuania amended the Rules for the Calculation of Maximum Exposure and Large Exposure of Credit Unions. It was established that from the beginning of the year 2013 credit unions will have to include the funds in credit institutions, i.e. banks and credit unions, into the maximum exposure amount. 34

35 Stricter prudential requirements (IV) To ensure that credit risk is assessed more conservatively, the Bank of Lithuania intends to tighten loans assessment (specific provisions formation), internal control, credit, liquidity and operational risk identification and management requirements for credit unions. The Bank of Lithuania has already approved new requirements for the establishment of credit unions (new requirements for business plans, inspections before issuing the license, etc.). The Regulatory working group is already working on the Law on Credit Unions. It is proposed a substantial increase in the minimum requirements for own credit union capital, share contributions, and the minimum number of union members. The amendments also aim at increasing the penalties for violations of prudential legal acts and making it possible to appoint a temporary representative to the union's governing bodies, who would enforce supervision of operations. 35

36 Recent events in CU sector 24th of January, 2013 National Credit Union 24th of January, 2013 Švyturio taupomoji kasa 9th of May, 2013 Laikinosios sostinės kreditas 36

37 National Credit Union, Švyturio taupomoji kasa and Laikinosios sostinės kreditas The impact of the bankruptcies of National Credit Union,,,Švyturio taupomoji kasa and Laikinosios sostinės kreditas to financial system is negligible mainly because: Credit unions accept deposits and lend only to their members; Credit unions have recently been rapidly growing in Lithuania, but their assets in 1 January, 2013, amounted to more than 2 billion LTL, was only 2.6 percent of assets of Lithuanian banking system; National Credit Union,,,Švyturio taupomoji kasa and Laikinosios sostinės kreditas are not systemically important, including respectively 4.6 percent, 0.8 percent ant 1 percent of the total assets of the credit union system. The bankruptcy proceedings are already initiated against these three credit unions. Since 15 February 2013 and respectively since 5 June 2013 depositors of these credit unions are able to get their insurance compensations from the Danske Bank. 37

38 Thank you for your attention 38