An amendment of the Act on Credit Unions has been approved and introduces several significant changes.

Proposed changes to this legislation primarily include:

• · The establishment of an upper limit for the balance sheet total of the credit union or group of credit unions in the amount of CZK 5 billion

The establishment of this limit will ensure that the credit union sector consists of relatively small entities in the future, and eliminate the current situation where several credit unions resemble the size of small banks. This also applies to groups of credit unions that act in accord or that are connected in another manner. The balance sheet total is considered an ideal indicator for illustrating the entity’s size. The limit threshold of CZK 5 billion is based on an internationally recognised standard according to the World Council of Credit Unions (hereinafter “WOCCU”). In its view, the size of the credit union’s institutional capital should be at least 10% of the entity’s balance sheet total, and taking this principle into account, corresponds to the statutory level of registered capital (CZK 500,000 million).

• · The Options for credit unions to  transform gradually into a bank

Previously, a credit union could transform into a bank through a so-called “step option.” The essence of this was to allow a change in legal form to a joint stock company, if the Czech National Bank (CNB) gave consent for such a transformation and also decided to grant a banking licence. In such a case, the credit union also had to meet, among other things, minimum registered capital requirements. However, this could pose a problem for credit unions that aspired to transform into a bank and met the other requirements, but did not have the required registered capital. Newly, therefore a reduced amount of registered capital will suffice to submit an application for a banking license, and this EUR 5 milion. All other requirements for granting a banking license remain in force.

• · Increase in the mandatory level of the credit union’s risk fund

Another change is an increase in the mandatory amount of the risk fund to a level of 30% of total outstanding loans and guarantees. A result of this change will be an increase in the annual contribution to the risk fund to at least 20% of the annual net profit reported in the financial statement, until such time as the risk fund reaches the proposed level of 30% of total outstanding loans and guarantees.

• · Establishment of a minimum membership contribution

The amendment introduces a minimum membership contribution of CZK 1,000. This amount is determined based on a combination of an absolute amount and percentage of deposits (without a ceiling for new deposits). It will have to be paid by all those interested in becoming a member of the credit union and using its services, both deposit and loans. The amendment also introduces a limitation on the amount of interest-bearing deposits per member of the given credit union to ten times the total amount of the basic membership contribution and a further membership contribution.

Conclusion

The amendment thus means stricter regulation of credit unions. The adoption of the proposed legislation should achieve a state where the credit union sector consists of ​​only reactively small entities, whose size will be closer to international practice; the current boom in the credit union sector should ease off, and the function of the credit union sector should align with internationally recognised standards according to WOCCU and, among other things, eliminate the current situation where credit unions can provide products and services to both members and non-members.

For more information, please contact our office’s partner, Mgr. Jiri Kučera, e-mail: jkucera@kuceralegal.cz ; tel.: + 420 604 242 241