Credit Unions Reserves – transfers in and out

In 2017, CUDA sought and obtained a practical interpretation to the restrictive and prescriptive reserve requirements contained in the 2016 Regulations. Despite the Regulations requiring that reserves must be “perpetual in nature”, we obtained CBI confirmation that transfers can be made by a credit union into and out of reserves held in excess of the 10% RR requirement. Please find below June 2017 Info Briefing post on this, and we attach the RCU/CUDA correspondence as circulated following our progress on this topic. Where required, please circulate the attached letter to your auditors.

June 2017 Info Briefing

We have now circulated correspondence between the RCU and CUDA to your credit unions following concerns relating to the perpetual and non-distributive nature of all reserves.           
The concerns centred on the apparent restrictive nature of the 2016 Regulations with respect to reserves (namely, Reg 3(1) (a-c)). Setion 45(1), 1997 Act, as amended, requires a credit union to ensure that the regulatory reserve is unrestricted and non-distributable. Section 45(2) requires that a credit union ensure all reserves remain adequate. However, Regulation 3(1) went a step further by requiring that all reserves are perpetual in nature, unrestricted and non-distributable. The difficulty is that this presents the possibility that credit unions are unable to utilise funds in their reserve accounts for distribution as dividend or otherwise intended.
Whilst it is acceptable that the regulatory reserve is defined as realised financial reserve (i.e. unrestricted and non-distributable), ensuring all reserves (as required under the Regulations) are perpetual and non-distributable was hampering credit unions effectively utilising the funds and ensuring that the accounts are maintained adequately taking into account the nature, scale and complexity of the credit union. 
We sought and obtained direction from the RCU in relation to Regulation 5, which requires a credit union to ensure compliance with Part 2 of the Regulations and Section 45, i.e. how can a credit union maintain the adequateness of the reserve if additional reserves (i.e. the reserve minus the regulatory reserve) cannot be decreased as well as increased in line with credit union requirements? 
The correspondence, now circulated, confirms that:
  • it is for the board of directors of each credit union to decide on the amount of reserves to hold in excess of this minimum requirement having taken prudent account of the scale and complexity of the credit union’s business, its risk profile and prevailing market conditions.
  • transfers can be made by a credit union into and out of reserves held in excess of the 10% minimum RR requirement so long as the credit union has satisfied itself that the total level of reserves held are appropriate taking prudent account of the scale and complexity of the credit union’s business, its risk profile and prevailing market conditions.

Credit Unions should refer to the correspondence for further analysis and if you have any queries, please contact us at the CUDA Offices (elaine.larke@cuda.ie or kevin.johnson@cuda.ie).