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CRED 8.2 Components of capital

CRED 8.2.1R
  1. (1)

    The following are included in the meaning of 'capital' for the purposes of this chapter:

    1. (a)

      audited reserves;

    2. (b)

      interim net profits;

    3. (c)

      subordinated debt meeting the requirements set out at CRED 8.2.1 R (4);

    4. (d)

      initial capital2; and

    5. (e)

      2revaluation reserves, arising from the differences between book values and the current market values of property fixed assets:

      1. (i)

        meeting the requirements in CRED 8.2.1 R (6) to CRED 8.2.1 R (7); and

      2. (ii)

        subject to the limit in CRED 8.2.1 R (8).

  2. (2)

    Audited reserves are audited accumulated profits or losses, or both, retained by a credit union after payment of tax and dividends. Reserves also include other realised gains and gifts of capital - for example from a sponsoring organisation.

  3. (3)

    Interim net profits are interim profits net of tax and anticipated dividends.

  4. (4)

    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;1

    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;

    8. (h)

      the debt must be unsecured and fully paid up.

  5. (5)

    Initial capital is a credit union's capital at the time it is given Part IV permission to accept deposits, but this does not apply in cases where the credit union is treated as having such a permission on credit unions day. Initial capital consists of a credit union's assets less its liabilities other than the liabilities set out in CRED 8.2.1 R(a)-(c).

  6. (6)

    2To 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 regular professional valuations of each property;

    3. (c)

      if professional valuations are not carried out annually, there must be:

      1. (i)

        a rolling programme such that no professional valuation of a property is more than five years old;

      2. (ii)

        in the intervening year(s) in which a property is not professionally valued, an interpolation of value by the Board which takes into account any decline in property values disclosed by valuations of other properties in that year;

    4. (d)

      any increase of revaluation reserve must be supported by a professional valuation.

  7. (7)

    2Subject to the conditions in CRED 8.2.1 R (6), and the limit in CRED 8.2.1 R (8), the amount of revaluation reserve used for the calculation of capital must be:

    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 FSA under SUP 16.7.62 R or SUP 16.12.5 R3 (see CRED 14.10.7 G); or

    2. (b)

      the amount of any such reserve in the accounting records of the credit union, for the time being;

    whichever is the lesser amount.

  8. (8)

    The amount of revaluation reserve included in the calculation of capital must not represent more than 25 per cent of the total of capital resources in CRED 8.2.1 R (1)(a) to CRED 8.2.1 R (1)(e).

CRED 8.2.1AG

1The effect of CRED 8.2.1 R(4)(a) is that the shortest permissible period for a subordinated loan qualifying as capital under CRED 8.2.1 R(4)(a) is five years and one day.

CRED 8.2.1BG

2Subordinated debt is due and payable only in accordance with CRED 8.2.1 R (4). However, this rule does not prevent the debt from being issued on terms which permit the credit union, in accordance with a board resolution, to repay the debt. The decision to repay the debt should be genuinely at the instance of the credit union's board. The credit union should satisfy itself that the remaining capital would be adequate for the credit union's present, and future foreseeable needs. The credit union should notify the FSA at least one month in advance of its intention to repay the debt (as indicated in CRED 14.9.5 G (3)), thereby giving the FSA the opportunity to raise objections to the proposed repayment. If repayment is proposed within the first five years, the FSA is likely to consider exercising its own-initiative powers to ensure that the credit union continues to satisfy the threshold conditions.

CRED 8.2.1CG

2The effect of CRED 8.2.1 R (8) is that no more than 25 per cent of a credit union's regulatory capital may consist of amounts deriving from the revaluation of property, however large the amount standing to the credit of the credit union's revaluation reserve.

CRED 8.2.2R

Negative reserves and any interim net losses must be deducted from capital.

CRED 8.2.3R

The amount of any subordinated loan counting towards a credit union's regulatory capital must, over its final four years to maturity, be written down by 20% of the amount of the loan per year. (See Table 8.2.4R.)

CRED 8.2.4R

Writing down subordinated loans over final four years

This table belongs to CRED 8.2.3 R

Years to maturity

Amount of loan counting towards capital

More than 4


Less than and including 4 but more than 3


Less than and including 3 but more than 2


Less than and including 2 but more than 1


Less than and including 1


CRED 8.2.5R
  1. (1)

    1When a credit union makes a subordinated loan to another credit union qualifying as capital under CRED 8.2.1 R(4)(a), the full amount of the loan (not the amount counting towards the borrower's capital under CRED 8.2.4 R) must be deducted from the lender's capital.

  2. (2)

    A subordinated loan within CRED 8.2.1 R(4)(a) is not an investment under CRED 7.2.1 R.

CRED 8.2.6G

1The effect of CRED 8.2.5 R is that the maturity limits in CRED 7.2.2 RCRED 7.2.3 R do not apply to subordinated loans made by a credit union.