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What is and What is Not Credit Union Capital CARTAC October 2010 Andy Poprawa, CEO Deposit Insurance Corporation of

2. Agenda. Why capital?Broad definitionsCooperative Philosophy

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What is and What is Not Credit Union Capital CARTAC October 2010 Andy Poprawa, CEO Deposit Insurance Corporation of

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    1. 1 What is and What is Not Credit Union Capital CARTAC October 2010 Andy Poprawa, CEO Deposit Insurance Corporation of Ontario

    2. 2 Agenda Why capital? Broad definitions Cooperative Philosophy & Capital Desired Characteristics Types of Credit Union Regulatory Capital What is Not Capital Emerging Issues Breakout Groups – 20 minutes

    3. 3 Why Capital? Provides funds for growth & investment Protection against normal/abnormal risk Protection for members & investors Metric of ability to sustain future losses Level/quality of capital instills confidence and encourages further investment

    4. 4 Broad Definitions Accounting Capital Capital = Assets – Liabilities Economic (Value) Capital Capital = EV of assets – EV of Liabilities Regulatory Capital Capital = Allowable Assets - Liabilities

    5. 5 Cooperative Philosophy & Capital Members are owners (1 member, 1 vote) Members share in profitability Expectation of profit distribution Potential for conflict – retained earnings for protection/growth vs. distribute to members

    6. 6 Desired Characteristics Permanency – no maturity, rights do not expire Stability - instruments cannot be redeemed at the option of the holder Availability – must be there when it’s needed Other desirable characteristics?

    7. 7 Measuring Capital Two measures used in Ontario Leverage (capital to assets) Risk Weighted Assets (BIS II test) Tier 1 (core) vs. Tier 2 (supplementary) BIS automatically adjusts capital to reflect risk in the credit union

    8. 8 Types of Credit Union Regulatory Capital Tier 1 Capital Membership shares Retained Earnings Contributed surplus Patronage shares (not redeemable in 1 year) Qualifying non-membership investment shares Accumulated net after tax unrealized losses on AFS equities reported in Other Comprehensive Income (OCI)

    9. 9 Types of Credit Union Regulatory Capital Tier 2 Capital Patronage shares – redeemable within 1 year Qualifying non-membership investment shares – redeemable within 1 year Subordinated debt – non-redeemable for 5 years General loan loss allowable up to a maximum Accumulated net after tax unrealized gains on AFS equities reported in Other Comprehensive Income (OCI)

    10. 10 Types of Credit Union Regulatory Capital Any Other Types of Permitted Regulatory Capital?

    11. 11 Traditional Credit Union Capital

    12. Ontario Capital Breakdown 12

    13. 13 What is Not Capital Share Deposits Certain types of reserves Deductions from Tier 1Capital: Goodwill Intangible assets Investments in financial subsidiaries Any other items that regulators deem Others?

    14. Emerging Issues BASEL III Deductions IFRS What’s capital, what’s not 14

    15. 15 Breakout Group Discussions What elements should a credit union bear in mind when determining the ‘right’ level of capital? Does quality of capital matter? Why? Regulatory capital (leverage) versus risk weighted capital – which is better? Why? As Supervisor, under what circumstances would you consider more capital necessary?

    16. Reporting Back from Discussion Groups Questions & Dialogue

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