The Bank of Israel today published the outline for the establishment of credit unions in Israel (“Process of licensing and establishing credit unions in Israel”) after receiving comments from the public and formulating solutions for the issues raised. This document details the threshold conditions for the establishment of credit unions in Israel and the stages required for their establishment, and constitutes a setting for an increase in the number of participants in and out of the banking system, and is an additional step in the adoption of recommendations by the Team to Examine Increasing Competitiveness in the Banking System.
With the aim of protecting the funds of depositors in credit unions and to prevent possible damage from the failure of “new players” that increase competition in the short term but do not survive in the long term, criteria have been established to ensure the stability of credit unions as detailed in the document—these criteria are for the most part unchanged from the guidelines published for public comment. The main changes are set out below:
v To remove barriers to entry for new credit unions, and to enable them to operate on the basis of a computer infrastructure that meets the required standard, the Bank of Israel will act to promote legislative amendments that will enable a banking corporation to provide computerization services to a credit union under a supervised commercial agreement.
v Directors in a credit union will be able to receive a salary and a limitation will be determined for the level of salary permitted (similar to the salary of directors in community interest companies).
v The capital adequacy requirement will be defined in terms of “simple leverage” (capital to total assets), rather than being measured in terms of “risk weighted assets” (capital to risk weighted assets) generally accepted in Basel II terminology. Accordingly, the requirement has been changed from 15 percent to 10 percent.
v A union with low-income members will be able, in special circumstances, to accept deposits also from non-members up to a maximum of 20 percent of the total deposits in the union.
v The requirements from the control and audit systems in a credit union will be adjusted to the size of the credit union (and will not necessarily be the same as the requirements for a commercial bank).
The public’s comments have shown the need to allow for the possibility of establishing very small credit unions, whether as an intermediate stage in the process of establishing credit unions or in order to meet the need of various groups to set up different models of small-scale, basic financial activities. Such activities do not present a systemic risk to financial stability, due to their size and limited features, and can therefore exist outside the framework of stability regulation. Consequently, and in order to provide a solution to the need that has arisen from the public’s comments on allowing the development of very small credit unions, the Bank of Israel will actively promote legislative amendments to allow these unions to operate without stability supervision. The precise definitions that will distinguish very small credit unions from supervised credit unions will be formulated during the legislative process, in line with the recommendations of the team examining the regulation of currency service providers.
The outline published today sets out the activities and steps required on the part of anyone seeking to establish a credit union and the manner in which the Banking Supervision Department will assist such a process until a license to engage in banking has been obtained.
The Supervisor of Banks, David Zaken, said, “The current outline will make it easier for socioeconomic ventures to operate, grow and develop into a cooperative banking entity. We will also endeavor to allow existing banks to provide computerization services to credit unions in a supervised commercial arrangement and thus ease their entry into the market. At the same time, we are taking steps to ensure the stability of the entities managing public funds, since a negative impact to the stability of a credit union is liable to undermine the entire process and eventually reduce the potential to increase competitiveness in the system.”
What is a credit union?
A credit union is a not for profit cooperative financial association owned and controlled by its members. Its aim is to provide its members with bank account management services, savings, loans, and other basic banking services. This limited range of services should provide a framework for the management of current account activities and can be a suitable alternative to account management in a commercial bank for a substantial part of the population. In a credit union, as a cooperative financial institution, the shareholders are the account holders themselves and they choose the union’s board of directors. Rules will be established in every credit union to define the rights and conditions of membership subject to the requirements of the law and based on the members’ common bond, with only members being able to manage an account in it.
Credit unions will operate according to a social orientation and will set for themselves the goal of improving their members’ welfare. Profits will be invested in improving services to members so as to ensure their welfare, and in the growth of the unions themselves. Setting up credit unions may contribute to an increase of competition in the banking system since their reduced cost structure and their social nature will make the services to their members relatively inexpensive. These unions are likely to appeal to an attractive customer community and thus indirectly lead to an improvement in conditions in the banking system for that reference group.