CRED 10.4 Large exposures
For the purposes of this section, a large exposure is defined as an individual net liability to the credit union which meets both of the following criteria:
- (1)
it is at least £5000;
- (2)
it is at least 10% of the value of the credit union's total capital.
An individual large exposure must not exceed 25% of the credit union's capital. In no circumstances may the aggregate total of all large exposures exceed 500% of the credit union's capital.
The aggregate total of all large exposures must not exceed 300% of capital without a credit union pre-notifying the FSA.
For the purposes of large exposures the maximum net liability of a credit union with assets of £500,000 and 8% capital would be £10,000 subject to CRED 10.4.2 R and CRED 10.3.4 R.
For a credit union with assets of £1million and 10% capital the maximum net liability would be £25,000.
Excessive exposure (large loans to an individual borrower and in aggregate) by a credit union can create a concentration of risk on the balance sheet and increase a credit union's vulnerability to bad debt. This can lead to a strain on capital and solvency. While this risk cannot be eliminated, it can be contained by limits and controlling the extent to which credit unions commit themselves to large exposures. Therefore the large exposure limits set the maximum sum that may be loaned to any one member as a percentage of reserves to prevent concentration. All credit unions should set and document their own large exposure policy limits to avoid concentration of risk. It is the committee of management's responsibility to monitor large exposures. The policy should be reviewed on an annual basis (or more frequently where required).