Central Bank Gov: Credit unions walking on risks

"Engaging in non-traditional activities without an adequate risk management framework or the required management, could put member savings at risk," he said at a recent Co-operative League breakfast meeting at Crowne Plaza. The theme was, "The New Credit Union Regulatory Regime : Prospects and Possibilities."

"Moreover, financial difficulties in one or two large credit unions could undermine confidence in the entire movement, and could conceivably have contagion effects on the entire financial system," he added.

Making out the case for formal regulation of the credit union sector, Williams said this was needed to protect the savings of its members and ultimately, to safeguard the integrity of the financial system.

Noting that the original proposal to bring the credit unions under the regulatory authority of the Central Bank was met with some disquiet in part, because it envisaged some division of the movement by asset size, Williams explained that there is no longer this concern.

"As far as I can judge, the credit union movement as a whole is strongly supportive of the need for more formal regulation, and understands and supports the rationale behind the appointment of the Central Bank as regulator," he said.

Williams noted that formal arrangements for the prudential regulation of credit unions were a relatively recent phenomenon.

He referred to data published by the World Council of Credit Unions (WOCCU) which indicated that only about one-third of 104 member countries surveyed had credit union-specific legislation.

"In these circumstances, we are currrently examining credit union legislation from Australia, Ireland, the United States as well as the model legislation published by the WOCCU, to help in the preparation of a draft which will serve as a basis for discussion with the League," said Williams.

He disclosed that the WOCCU lists capital adequacy as a key element in credit union legislation, and in its paper on best practices, encourages credit unions to maintain a level of capital adequacy or institutional capital.

"Such capital does not belong to individual members, but to the membership as a whole, and is to be used as a buffer against unforeseen losses which will be charged against members’ deposits.

"Such capital also helps the credit union remain competitive and supports growth," said Williams.

He explained that when the new legislationn comes into being, some credit unions would not be in compliance.

"However, we would need to discuss and agree on an appropriate transition period, to allow credit unions to make the necessary adjustments, to meet the provisions of the new legislation," said Williams.

He then listed some of the standard provisions of the FIA and the Insurance Act that will also need to be incorporated into the draft credit union bill.

These provisions will cover among other things, the authority for the regulators to share information with other regulators — local, regional and international; the regulator’s ability to levy civil money penalties for non-compliance, fit and proper criteria for directors and senior officers of credit unions and anti-money laundering supervisory practices.