Liquidity

Part

CREDS Credit Unions New sourcebook

Chapter

Liquidity

Printed on: 04/07/2024

Rulebook at: 08/01/2012

CREDS 6

Liquidity

CREDS 6.1

Application and purpose

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Application

CREDS 6.1.1

This chapter applies to all credit unions.

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Purpose

CREDS 6.1.2

This chapter amplifies Principle 4, under which a credit union must maintain adequate financial resources, and the threshold condition for permission that a credit union's resources must be adequate in relation to the regulated activities that it carries on (see COND 2.4).

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CREDS 6.1.3

A central feature of credit union business is maturity transformation, in other words taking short-term deposits (in the form of share accounts) from members and making comparatively long-term loans. It is important, in order to maintain confidence and protect members, that a credit union has adequate liquid assets (liquidity) to enable it to fulfil members' withdrawal requests within expected timeframes.

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CREDS 6.2

General requirements

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Liquid assets

CREDS 6.2.1

A credit union must hold liquid assets of an amount and composition that is prudent and appropriate to the scale and nature of its business, having regard to material risks, including the risk of a sudden adverse cash flow, with a view to enabling it to meet its objectives.

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CREDS 6.2.2

The liquid assets held by a credit union should be sufficient to meet its day-to-day business needs and to provide an appropriate cushion in the event of pressure arising from unexpected events.

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CREDS 6.2.3

The responsibility for ensuring that a credit union can meet its obligations as they fall due rests with the credit union's management.

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Liquid management policy statement

CREDS 6.2.4

A credit union must establish, maintain and implement an up-to-date liquidity management policy statement approved by the committee of management and designed to ensure its compliance with CREDS 6.2.1 R.

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CREDS 6.2.5

A version 2 credit union must send to the FSA a copy of its liquidity management policy statement as soon as reasonably practicable after it has been approved by the committee of management.

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CREDS 6.2.6

A credit union should be able to satisfy the FSA on a continuing basis that it has a prudent liquidity management policy and adequate management systems in place to ensure that the policy is adhered to.

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CREDS 6.2.7

The liquidity management policy statement of a credit union should set out the credit union's objectives for liquidity, the limits within which liquidity should be maintained, and the types of liquid assets which the credit union should hold.

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CREDS 6.2.8

A credit union's committee of management should review and approve its liquidity management policy statement at least once a year, and more frequently if necessary, especially in the light of significant changes in business.

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CREDS 6.2.9

Where a version 2 credit union has borrowed wholesale funds, the maturity of such funds and the risk of their not being able to be refinanced should be taken into account in the formulation of the credit union's liquidity management policy statement.

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CREDS 6.2.10

When a credit union provides ancillary services such as issuing and administering means of payment and money transmission, it should take into account the potentially greater volatility of its funds when deciding what amount and composition of liquid assets is necessary to comply with CREDS 6.2.1 R.

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CREDS 6.3

Minimum liquidity requirements

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CREDS 6.3.1

A credit union must at all times hold liquid assets of a value equal to at least 5% of its total relevant liabilities.

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CREDS 6.3.2

A credit union must further hold enough liquid assets to ensure that on no two consecutive quarter ends is the level of the credit union's liquid assets below 10% of its total relevant liabilities.

[Note: a transitional provision applies to this rule: see CREDS TP 1.2.]

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CREDS 6.3.3

The liquidity requirements set out in CREDS 6.3.1 R and CREDS 6.3.2 R are minimum requirements and are subject to the overarching requirement of CREDS 6.2.1 R.

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CREDS 6.3.4

(1) For the purposes of CREDS 6.3.1 R and CREDS 6.3.2 R, only those assets will count as liquid which can be realised for cash at short notice, and within at most eight days.
(2) Amounts loaned by one credit union to another must not be counted as liquid by the lender.

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CREDS 6.3.5

For the purposes of calculating the ratio of a credit union's liquid assets to its total relevant liabilities (in CREDS 6.3.1 R and CREDS 6.3.2 R), assets must be valued at the amount for which they could be realised within eight days.

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CREDS 6.3.6

(1) For the purposes of calculating the ratio of a credit union's liquid assets to its total relevant liabilities (in CREDS 6.3.1 R and CREDS 6.3.2 R), the securities referred to in CREDS 3.2.1 R to CREDS 3.2.3 R must be valued on the basis that they could be realised at market value minus the following discounts (whether or not this is the case in fact):

(a) maturity less than 1 year - zero;
(b) maturity 1 to 5 years - 5%.

(2) Compliance with CREDS 6.3.6E (1) may be relied on as tending to establish compliance with CREDS 6.3.5 R (the 8-day realisation-value rule).

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CREDS 6.3.7

An asset maturing on a non-business day should be regarded as maturing on the succeeding business day.

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CREDS 6.3.8

For the purposes of clarity, funds serving liquidity purposes may be invested in the manner set out in CREDS 3.2.1 R provided that the resulting assets satisfy the relevant requirements of this chapter.

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CREDS 6.3.9

Where a credit union buys or holds property as premises from which to conduct its business, the credit union should not count those premises as liquid assets for the purposes of CREDS 6.3.4 R.

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