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CREDS 5.2 Components of capital

CREDS 5.2.1R
  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)

      deferred shares;

    4. (d)

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

    5. (e)

      initial capital; and

    6. (f)

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

      1. (i)

        meet the requirements in (6) to (7); and

      2. (ii)

        are subject to the limit in (8).

  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. Reserves also include other realised gains and gifts of capital, for example from a sponsoring organisation. Deferred shares are included in the meaning of 'capital' 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 shares subscribed for in full, and transferred to the 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)

    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;

    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 4A 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. For this purpose, liabilities do not include the items set out in (1)(a) to (c).

  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 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)

    Subject to the conditions in (6), and the limit in (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 PRA2 under SUP 16.12.5 R (see CREDS 8.2.3 G); or

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    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 (1)(a) to (f).1

    1
CREDS 5.2.2G

The effect of CREDS 5.2.1 R (4)(a) is that the shortest permissible period for a subordinated loan qualifying as capital under CREDS 5.2.1 R (4)(a) is five years and one day.