Development Best Practices in Credit Union Supervision: Regulatory Standards

This paper discusses regulation and supervision standards for credit unions through the issuance of model bylaws and prudential rules and regulations. It recommends that a model bylaw should define:

• Field of membership;
• Membership requirements;
• Scope of activities;
• Services offered;
• Management duties and responsibilities.

The paper also suggests that prudential regulations should be issued, at least in the areas of:

• Capital adequacy - Maintenance of a minimum institutional capital to total assets ratio, normally 10%;
• Allowances for assets losses - Maintenance of provisions for potential asset losses;
• Licensing and entry requirements - Specifications on required documentation, education and background of founding officials, minimum institutional capital, minimum number of members and Management Information System (MIS) requirements;
• Avoiding liquidity risk - Maintenance of a minimum level of liquid assets, usually a ratio of liquid assets to total deposits between 10% to 15%;
• Restricting fixed assets - Investments in fixed assets to be limited to the amount of capital or a percentage of total assets, often 5% of total assets;
• Member loans and portfolio diversification - Specifications such as maximum maturity, interest rate maximums, collateral requirements, maximum loans to one individual or group;
• Standardization of loan delinquency calculations;
• Specifications for standardized accounting, external audits and records preservation;
• Standards on external credit and non-member deposits;
• Specifications for investments outside member loans.