The Prudential Regulation Authority (PRA) has announced it is taking action to address the barriers to growth for credit unions, and that it is to launch a consultation on changing capital requirements for credit unions in order to simplify them.

Speaking at the Mansion House, London, PRA deputy governor for prudential regulation and CEO, Sam Woods, explained the work the regulator is doing to lower the barriers to growth for small banks.

“On credit risk, we have taken three very important steps in recent years: the introduction of our modular approach for IRB applications; the introduction of our ‘holistic’ approach to P2A-setting for eligible firms on standardised; and our success in getting Basel to agree to lower the Standardised Approach risk-weight for low-LTV mortgages very substantially, from 35% to 20%, for firms on standardised.

“MREL, set by the bank as Resolution Authority, is set to ensure that a bank in resolution can meet going concern regulatory capital standards, so any change in regulatory capital standards will automatically be reflected in MREL.

“We continue to take a close interest in both of these areas, but they have crowded out discussion of everything else in the barriers to growth area – so today I want to fill in the rest of the picture.”

Woods revealed the PRA’s plans for changing the capital requirements that credit unions need to help simplify the process of growth.

The PRA’s proposed changes include getting rid of the current ‘slab’ system – where firms must hold 10% on their entire asset base if they grow a single pound over £10m in assets – to be replaced with an income-tax-style approach, where larger credit unions would be required to hold 5% capital for assets up to £10m, 8% for assets between £10m and £50m, and 10% for assets above £50m.

The regulator is also suggesting to maintain capital requirements at 3% for credit unions with total assets less than £5m, but introducing a ‘monitoring zone’ of 3-5% - whereby if a smaller credit union’s capital falls below 5%, the PRA would step up its supervisory activity.

The PRA hopes that in time, this will help contain the rate of credit union failures – which is currently disproportionately high amongst smaller firms.

The final proposed change is to simplify the regime by eliminating other capital requirements thresholds linked to non-asset metrics, such as membership numbers and the variety of business lines.

Woods added: “The effect of these changes should be to reduce overall capital requirements for the credit union sector by roughly one quarter, and encourage the growth of successful credit unions by removing several cliff-edges present in our current regime.

“The changes we are proposing today are an example of what we can do when we bring a bit of fresh thinking, supported by our emerging army of regulatory robots, to the question of barriers to growth.”

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