IRISH CREDIT UNIONS VOICES FOR THE FUTURE

Irish Finance Minister Orders Review of Credit Union Sector

2009-10-28T15:51:00.003Z

Irish Finance Minister Orders Review of Credit Union Sector

Concerned over the financial stability of the sector, Minister for Finance, Brian Lenihan has ordered regulatory authorities to carry out a review of the sector:

http://www.sbpost.ie/news/ireland/review-ordered-of-credit-union-sector-45238.html

It appears that having dealt with banking stability, attention is now shifting to credit unions.

While credit unionists have been anxious to paint credit unions in a positive light the truth is their business model is under extreme pressure for some time. Lending less than 50% of assets, and rising costs, credit unions are non-diversified and wholly reliant on declining investment income to bolster operating income.

Worldwide credit co-operatives have proven to have been resilient during the global credit crisis. However the Irish credit union model has yet to demonstrate it is capable of weathering one of the worst domestic recessions in the developed world.

So far anecdotal evidence, League and regulatory communications point to problems of near crisis proportions emerging. Financial performance trends, worsening in recent years, are set to escalate as losses in imprudent investments and loans bite into balance sheets.

Exposed to unsecured consumer lending, largely advanced to marginalised borrowers, credit union loan delinquency has risen to 10% well in excess of the minimum safety levels of 5%. More worrying is the fact that loan write offs on a consumer loan book of €7bn are said to be less than 1% which bucks the trend seen in commercial bank accounting for their consumer loan losses. Credit unions do not operate in a bubble and they are highly exposed to rising consumer loan defaults.

Ireland has one of the highest levels of consumer indebtedness, with one in three home mortgagees said to be experiencing negative equity. Unemployment is nearing 500,000 with outbound migration rising. Fiscal budgetary arithmetic is forcing government to slash public spending and raise new taxes.

Most credit union lending can be said to have been sub-prime during the boom years as good credit risk customers forsook their credit unions. Much of the lending was also provided to first timers financing their equity participation in the home purchases.

Added to this is the nature of borrowing which selected against the credit union as it didn’t use credit bureau services. Irish credit unions are classic examples of borrower’s informational asymmetry power versus credit unions poor risk rating and affordability assessment processes.

Emphasising the safety of savers funds, the regulator now requires credit unions to maintain a minimum of 10% of reserves to total assets. The move was necessary to prevent credit unions raiding their reserves to pay dividends (interest) to savers as their profits collapsed. Cutting in some forbearance reduced the numbers of those expected not to be able to pay a dividend from over 200 to 50 or so. The move is indicative of the scale of the problems facing credit unions to ensure they remain economically viable regulated credit institutions.

The Ministers review may finally highlight for him the extent to which the sector needs to reform if it is to deliver on its economic and social purpose.

Are Irish credit unions fit for the future?

2009-10-28T14:49:00.005Z

A telling study of Irish and Canadian credit unions identified four strategic orientations found in credit union movements. These were

1: A financial institution providing a full range of financial services in direct competition with other financial institutions and must generate sufficient profits to remain competitive.

2: That of a financial cooperative providing financial services for the maximum benefit of its members regardless of the level of profit generated.

3: Providing for the financial needs of its borrowing members while meeting operating expenses and maximizing the return to saving members.

4: Providing credit services for financially excluded individuals who would otherwise be unable to access credit.

Two out of three Canadian credit unions said they adopted the first orientation – but only 6% of Irish credit unions said they did. Over a third of Irish credit unions said they operated the second and over half the third. Only 5% said they operated the fourth.

Other studies have highlighted a short term planning horizon with less than 25% having a business plan and 70% making little or no provision for an intergenerational hand over of governance and management.

These findings are disturbing as they mean that most Irish credit unions have neither have any view of the future nor any plans to invest in long term sustainability. Nor are they planning to hand over the reigns to the next generation.

At EU level the importance of co-operative banking (including credit unions) is provided for under a laws that prevent current membership/owners raiding the co-operatives reserves for their own benefit. The view is co-operative capital represents an intergenerational endowment and current boards and managers are its trustees.

So what have Irish credit unions being doing to ensure economic viability and long term sustainability – the protection and enhancement of the intergenerational endowment?

Very little – the entire effort has been focused on competing with each other to pay the highest dividend which is a feature found when aging boards become captive of a savers mandate – they act to maximise dividends at year end.

With a strategic orientation focussed on the doctrine of dividend maxmisation and short term "year end" planning horizon, Irish credit unions will be sorely challenged to safely manage through the worst recession in Ireland's recent history.

Is the World Conference A shameful waste of money?

2009-07-28T23:49:00.003+01:00

In a year when over 200 credit unions will struggle to make any profit the news that 80 or so were travelling to the WOCCU annual conference was bizarre.

There is no excuse for spending so much for so little return at a time when the Irish movement is on its financial knees. It's a time when the financial regulator in its annual report gave a chilling insight into what happened in 2008 and warned about 2009. A time, when tens of thousands of credit union customers are losing their jobs and unable to repay their loans. A time when savings volumes are declining, loan delinquency rising, liquidity is collapsing and solvency imploding.

This is the time when 80 credit unionists fly out, to do exactly what?

To make matters even more bizarre it seems the entire board of ILCU travelled. The usual naïve nonsense of “rewarding unremunerated directors” was peddled as an excuse as the ILCU refused to provide details of the size of the Irish delegation to a national daily the Irish Examiner. Undaunted the Examiner obtained the information and printed it. ILCU declined to talk saying it was concerned over the spin that would be put on the story. Spin? There’s no spinning the fact that once again money is being spent for little or no return.

Close onto 1000 Irish delegates have attended WOCCU world conferences since they first started. Many have of course travelled more than once as they are serial attendees. Yet for all the money spent, which must be in excess of €1m not one initiative, new product or service innovation or any change at all has been implemented arising from these trips.

Be Brave and Do the Right Thing

2009-06-26T13:37:00.002+01:00

When the dust finally settles on credit union crisis two things may emerge. The first may be enforced reform and the second a split as the movement fragments into various constituencies.

Reform may be enforced by virtue of the state supporting credit unions through a guarantee or some form of NAMA solution for investment losses. And the state will be right to insist on reform.

Its sheer nonsense to continue to carry on the business using a model that is decades out of date. Credit unions whether the like it or no will be forced to adopt the savings and loans model where they will be funded through deposits and share accounts will represent a form of equity investment carrying higher potential returns paid from residual profits. They will also be required to get the business of savings and loans right – they will never be allowed to build large scale investment portfolios again and many will be required to unwind from their ludicrous high risk exposures they should never have built.

They will be required to shrink balance sheet size if they cannot lend. This means learning to operate on a slimmer budget and reduce costs in line. Already there is a move to reduce the cost of free LP/LS insurance coverage and some will shortly move to a hybrid free/member pay model.

Enforced mergers will become common place and may be facilitated through some form of government intervention. Left to ILCU or credit unions themselves consolidation will become a shambolic mess. Indeed I would argue that credit unions should look for a central agency tasked with consolidating the sector. There is only one sponsor with the power to ensure a proper approach and that is Government. It most certainly is not a trade body, ILCU or CUDA, operating through a self-directing stabilisation system no matter how well intentioned or for that matter regulated.

The nonsense of launching a universal banking account will have to take a back seat.
Credit unions cannot afford to increase costs any further and do not have the resources to support the investment and effort required to build a meaningful presence in the consumer current account/transactional market. In any event the marketing spend required to achieve even a 1% market share gain would bankrupt many operations.

Lending safely will be quite a challenge given the sub-prime pathology inherent within lending practices and the publics’ perception of credit unions being a clubby poor man’s bank. The current media advertising campaign is correct to position lending in the right market space but will need a hell of a lot of local intense marketing to make it pay. It’s failing to gain traction as the news is that new lending volumes are declining and not increasing.

In their short life time of only 50 years credit unions have never faced such dangerous times. The absence of a central body charged with ensuring financial stability and having the resources to do so is making matters far worse. Most directors will be unaware of the danger inherent in governments’ recent moves to legislate for private stabilisation – they may even believe it is a good thing. Far from it, private schemes have failed or been shut down everywhere else in favour of government agencies who have been largely successful in ensuring strong stable credit union movements. The real danger lurking in the long grass is that credit unions will be left to sort out their own problems which is something in the absence of leadership, competence and ability they will be unable to do. One senses that a hidden anti-credit union agenda hides behind political rhetoric. Memories of times when credit union reneged on a deal and nearly brought down a government remain strong.

The brave thing to do is to actively advocate for and insist on a government supported and empowered “credit union support agency” tasked with helping the movement trade through its crisis and facilitating consolidation onto a stable financial platform for the future.

How many credit unionist leaders would adopt such a position today? How many would be prepared to argue for reduced autonomy within a federalist system to achieve a sustainable future?

Is the son of ISIS in trouble?

2009-06-18T20:04:00.005+01:00

The latest strategy in action emerging from Mount Street's mandarins reads like a poor assignment from a first year business student. ILCU has managed to convince its members during its annual town hall meeting to let it spend €4.5m of their money on yet another ill-conceived IT system development.

Firstly it’s important to understand it’s not what technology may do but what matters is the use it is put to. Studies have analysed how people use technology in ways not originally intended or at least not made explicit in the IT business case.

ILCU’s latest venture is a classic case study in wool pulling techno babble hiding the real strategy underneath Techie jargon. Feeding a rich diet of project governance, management and the meaningless phraseology beloved of IT people, it believes it can fool all of the people all of the time. But not it seems a growing body of credit unions that have once again sussed the real ILCU ambition and are withdrawing support and funding. Well done to all concerned for calling what is becoming ISIS mark 2.

The game is up. Sold as a benign, value add, secure data network over which data would stream and products and services are to be delivered the real intent behind the technology has been outed. ILCU want to own a gateway to credit unions, dominate and thus control providers assess to them and control product development. It’s a classic distribution control strategy where the gateway owner sets the terms and conditions for both credit unions and their service providers. Everyone would be locked into the ambitions and designs of ILCU.

Thing is a secure data network ain’t a bad idea if its owned, governed and managed by a reputable IT provider whose only objective is to provide, operate and manage the network. But ILCU hasn’t set its project up in this way and has no intention of losing control over its ownership and use.

Apart from gateway control ILCU has a more serious intent. By constructing a BIS or MIS ,what it calls Business Intelligence, it will build a central monitoring and control system. The question becomes why do this?

The answer is all too obvious when its in-system regulatory, stabilisation and central treasury ambitions are factored in. In short the League wants to become the corporate head office for credit unions that will be forced to cede autonomy becoming more like branches of a co-operative banking system.

Is this a bad thing? Maybe not. If the clear strategy and intent is for Irish credit unions to adopt a federalist model then a central corporate body will be needed. The problem is of course ILCU can never be that body at least not in its current form, structure and governance. It doesn’t have the organisational independence, competence or financial resources to deliver nor at this time has it the necessary legal framework within which to deliver. It probably thinks it does. Once the new Central Banking Commission gets wind of what it’s up to its gamble to spend millions of money it does not have on a system that only some will use will probably grind to a halt.

In fact one of the reasons why credit unions haven’t developed centralist co-operative supports is because of the existence of the ILCU as a body. It has a life of its own, a structure and system that is separate from and distant from credit unions. They may own ILCU, may vote on its direction and its permitted activities but it is an independent entity with it own purpose and ambitions. It’s why it always fails to deliver on big projects and will fail in this one too. It has no credibility with the credit unions that matter.

So far there’s no sign of the Financial Regulator who should have a legitimate oversight role in ensuring an important IT system is funded, developed, governed and managed by a competent recognised IT provider. Such is the importance of such systems that they pose significant systemic risks of their own right.

There’s many a slip between cup and lip and grandiose promises to deliver have fallen foul of ability to deliver. It seems that the latest plan is already running behind schedule and in danger of stalling.

Rhetoric Rules the Roost in the Face of A Crisis

2009-06-18T14:09:00.003+01:00

Debate on credit unions is frequently sidetracked by a rhetoric that demonstrates a serious lack of thought or fact based discussion. The overwhelming majority of credit unionists have few financial qualifications and their only experience is the small works of their local credit union. Their view is formed through constant repetition of doing things as they have been done for the past 50 years. Credit unionists and their human systems have become skilled at incompetence. This is not to criticise, merely to state a position. It explains why since inception not one major core product or service development has been successfully executed. The products and services offered remain the same as they were 50 years ago. No innovation and no change – why?

The Irish governments new DGS laws illustrate that few if any credit union directors, managers are aware of what deposit insurance is and what its objectives are. If they were they would have objected to the states inclusion of credit unions in the banks scheme and would have insisted on a properly designed credit union system as found in the US and Canada. But that opportunity has been lost as the ILCU fought and lost in its demand for a private scheme, it did not have the competence of resources to manage. In terms of what is called the financial safety net, Ireland has the most ineffective system in the developed world. It is wholly inadequate and one of the reasons why the sector is in crisis.

Credit unions are a unique form of banking. This is crucial to understanding what their business is and how the Irish model has become an aberration and why it is now bust. There are three distinct models for credit unions, found across the world, depending on the maturity of the sector. The first is a finance company funded through shares, leveraged off deposits where “interest” is a return on a share in profits. The second is a savings and loans specialist, funded by deposits with a broad line of savings and loan products, tracking the market on rates and the third a full service co-operative banking service offering savings, transaction accounts, small business services, mortgages, credit cards, life insurance, investments and so on.

The Irish model has been stuck in the finance model for the past twenty years and is at the root of why credit unions cannot pay a dividend this year and why over 100 will fail within two years. Some are trying to make the shift to savings and loans but cannot do so on their own – they are missing the central resources found elsewhere.

Stuck with the finance model, they haven’t been making enough loans for over ten years. As costs have escalated margins have shrunk and the core business of savings and loans is loss making. Some have no chance to reverse this trend and have become what the regulator and others call savings clubs. Income is entirely interest income – fee income from the few additional services provided is less that 1% of total income. Contrast this with a movement that did change, Australian credit unions are full service with interest income comprising 70% and fee income 30%.

The reason why this has happened is in credit unionist thinking and response to their customers. Because the emphasis is in on shares and maximising the return to shareholder (dividend) credit unions have been managed to maximise profits to finance high dividend payments. Had credit unions competed close to market rates in the past ten years they would have retained an additional €300m in reserves which should have been invested in improving products, services and expanding lending activity. But they didn’t. Instead they remained fixated on share balances and were sucked into what became an investment bubble, that when it burst lost €500m. In short the ill-advised strategy promoted by the ILCU cost the movement close onto €800m in foregone financial reserves without adding the money written off on IT projects etc.

So why didn’t credit unions away from the finance model to savings and loans specialist or full service co-operatives. The answer lies in the insistence on retaining independent autonomy and innate inability to co-operate. The paradox is Irish credit unions have not learned how to co-operate with each other.

Yet they have a marvellous opportunity to rebuild their business and begin lending again – thing is they will not be able to do this on their own and need help badly. There is only one sponsor with the pockets and power to insist on change and that is government – but what are the chances of it moving from its position where it considers credit unions less than systemically important and is maintaining the most ineffective financial safety net in the modern world.

Irish Credit Union Crisis to reach a Crescendo this Year

2009-06-04T13:51:00.007+01:00

With now over 200 loss making operations, Ireland's network of independent stand alone mini-banks will almost certainly face a major run on savings later this year.

Once savers figure out their credit union can’t pay a dividend and will be unlikely to be able to pay next year as well, they will move in droves to high street government guaranteed banks.

Why can’t credit unions pay a dividend?

The straight forward answer is the business model, as practiced in Ireland, hasn’t been working that well for a while. Credit unions have not been making enough loans. They should have been lending more and investing less over the past ten years.

Their main source of income should be interest paid on loans supplemented by fee income from sales of other products and services with a contribution from money invested in liquid investment assets. Seriously underlent, lower margin investments account for at least 50% of income earning assets. Far too much is tied up in illiquid instruments that are also significantly loss making.

Irish credit unions are at best 50% lent and many are operating at far lower levels. This means that in almost all cases loan interest income does not cover the costs of running their savings and loans operations. The problem is that credit unions cannot now increase lending. The scale of the economic recession and increase in consumer credit risk makes safe lending far more difficult. To make matters worse because credit unions have money tied up in illiquid investments they haven’t the free money to lend.

On top of this people are taking their money out chasing higher high street rates. At the same time loan repayments are rapidly declining as people default on loan repayments. Cash flow or money to fund withdrawals and new loans is very tight. So tight, that the regulator has instructed a large number of credit unions to restrict new loans to percentage of monthly net cash flow (loan repayments + new deposits).

The cash flow scenario is ripe for a liquidity collapse forcing the closure of a large number of credit unions.

Some are borrowing from others to support liquidity shortfalls but inter-credit union lending is fraught with default risks few will have the financial competence to assess or understand.

It is even said that some have engaged in cross-border transactions to massage liquidity positions in advance of making regulatory returns.

Investment and loan losses, which will plunge many into the red, can only be financed from already thin capital reserves. Just how many are exposed to insolvency risk or will have seriously impaired solvency levels is unknown. For sure many will be unable to increase lending volumes off their deficient reserve levels.

Plans by the regulator to regulate capital adequacy through a 10% "statutory reserve to total assets ratio" are meeting with trade body resistance that appears to taking on a political dimension. The question is will the Irish Finance Minister prevail upon the regulator to forebear as has happened in the past? Or will the Minister and his officials back up the Regulator? Irish government officials have a reputation for not being entirely supportive of the credit union regulator in the past which has led to enforced forebearance particularly withy investments. Had the regulator's requirement to restrict investments been agreed to in 2004/05, tens of millions would not have been lost last year.

So where does this leave credit unions?

One can predict a series of high profile loss making credit unions causing a collapse in trust and confidence in all credit unions. This would result in a run with many forced to close their doors as they run out of cash to fund withdrawals. In this scenario no credit union will be safe and no matter how financially robust all will suffer. This could happen either this year or next year.

Sticky plaster solutions will be applied – credit unions may be allowed to raid the family silver to pay dividends – but dipping into reserves has to be paid for next year and the year after.

There may also be an “investment loss” support scheme – where government guarantees are provided to allow credit unions use impaired assets as security for emergency liquidity lines. But again this will have to be paid for and losses financed over time.

Whether the outcome is a "Big Bang" run on savings or a credit union bail out process the net effect is the same. Credit union balance sheets are seriously damaged and can only be repaired from lending income. And credit unions are very poor at lending especially in a high risk economic environment.

The upshot is a period of self-enforced mergers as weaker credit unions vote to amalgamate with stronger neighbours – where there is one. Others may well opt to close. In a few short years numbers will dramatically decline – probably by more than half.

Left to chance, shrinking the sector to a financially stable size will be a chaotic shambles unless that is Government intervenes and forces change to the way Irish credit unions are structured, governed and managed. Such intervention may well be the price of providing state support.

Inevitable, avoidable and preventable the Irish credit union crisis will cause many to take stock of safety and soundness of the credit union business model. Before they do they need to understand what went wrong in Ireland and how a generation of directors and their trade body failed to modernise and allowed credit unions become dysfunctional investment managers. It is a story of poor governance, leadership and management. It is also a story of political capitivity which enforced regulatory forebearance.

Half of all Irish Credit Unions running at a loss

2009-06-02T01:06:00.003+01:00

The heat is on. One in two credit unions are running at a loss and will be unable to pay a dividend this year and will struggle to pay one next year as well. From the smallest to the largest, boards are fretting over how to deal with the bad news they will deliver later this year.

Doubtless none are telling their members now that they will not be paid a dividend which raises a quite serious ethical dilemma for any credit union board – does it tell now or wait for the AGM.

According to the ILCU it’s ok for credit unions not to pay interest (dividend) to savers. It says interest was low anyway as people only have on average €4000 on deposit. What a load of tosh – the average includes dormant, inactive, low balance accounts, penny savings accounts and a host of tiny balances no one even remembers they have.

Then again it has also said it wants to see attachment orders usable by credit unions chasing loan arrears. And what’s more it also wants credit unions to be able to grab people’s non-home assets as security for their debts.

Despite major media stories highlighting that half of all credit unions are running at a loss and despite regulatory admission of over a hundred loss making unions for the first quarter (Oct-Dec 08) the ILCU says:

“The most up to date prudential returns do not support the view put forward in the Independent story.”

And it wants credit unions to say this to their customers. What they should be telling their customers is whether or not they will be able to pay a dividend this year. All ILCU is saying is the prudential returns do not support the story – but credit union management accounts would if published

Quoted in the Irish Independent, League CEO Brennan said "Losses will not be reported by half of credit unions or anything near that” Now according to regulatory statements over 100 were operating at a loss and unlikely to recover before the year end. So the figure must be between this and the Independents half of 405 (there are more than 405 but no ones telling the others at this time!)

Strangely it seems ILCU petitioned the Minister for Finance to undertake a “risk review” – another version has the Ministers asking the League to do a review. Has the Minister asked the Regulator and if not why not?

So what does “or anything near that” mean – is it half of half of all credit unions which is closer to the regulators opinion or is it between “half of” and “half of half of” ? It’s time methinks for ILCU to come clean on what it knows instead of playing word games that mean absolutely nothing.

Faced with the one of the largest crisis of any credit union movement the leading trade body is in denial. What’s worse it’s about to true to act as a prudential supervisor by introducing and supervising its own “capital policy”.

More like a bad cut and paste job it proposes risk based capital allocation based on a credit unions risk profile. What absolute utter tosh! Nowhere has any regulatory authority successfully linked capital adequacy to credit institution risk profiling based on global performance scores such as Pearls or Camel. (Risk profiling is sometimes used to price risk premiums for deposit insurance and where the agency is a state body.)

To make matters worse the majority of credit unions actually voted for it without even understanding what it means or represents. It matters little as the League hasn’t the competence to make it work – what’s more it cannot enforce the standard – not unless that is it is also the only mandatory stabilisation provider which is where the real action is. So let’s call a spade a spade shall we.

1. 200+ credit unions will be loss making this year
2. Losses will have to be written off against reserves
3. They will not be able to use reserves to pay a dividend
4. If they do, then reserves will be seriously impacted
5. What happens next year?

What’s wrong with the regulators regulatory reserve ratio?
10% is all -
It’s simple to understand and operate
It is in line with international practice for small unsophisticated credit co-operatives
10% may be too high or too low!

What’s right about ILCU’s version?
It’s complex & badly thought through
It’s a cut and paste without the intellectual rigor or empirical evidence to back it up
Pearls Ratios do not capture risk in its entirety
It’s right if what you want is to become a central governing corporate entity
It fits with the IT strategy which is all about a central MIS to judge risk and performance
It fits if you also provide stabilisation and can charge risk based premiums
Has ILCU explained what it’s really after?
Will be allowed to fulfil its ambition
Should it be allowed?

ILCU Killarney Pageant will Fail to Inspire

2009-04-24T14:54:00.004+01:00

This weekend credit union people from all over Ireland will gather in Killarney for the annual ILCU pageant. This year two major issues are to be dealt with, that frankly are a sheer waste of time and effort.

The first is the Deloitte “independent” report on ILCU’s role in promoting investments that have lost so much money. It reads as somewhat of a whitewash but is critical of a lack of duty of care to credit unions in not keeping an eye on the products being sold under its scheme. In the main the synopsis of a report that has only been given to Enfield Credit Union has issued a soft slap on the wrists and tells the ILCU to be more careful in future. This leaves it free to continue to develop its central treasury service. With tens of millions wiped off credit union balance sheets a collective feeling of guilt will probably prevent them from holding their trade body to account.

The report of course once again highlights the enormous gap in the movement’s financial structures. There should be a central liquidity manager with whom credit unions must pool liquidity. In Australia credit union owners of CUSCAL place excess liquidity and access a range of capital and liquidity supports including access to the money markets and loan securitisation programmes. The same is true of Canadian central credit unions that have for decades been plugged into money markets and money transmission system. US credit unions have well developed system of not only central credit unions but a central credit union for central credit unions – they would given the continental size of the marketplace.

In many respects the Deloitte report is a “so what”. What matters is what happens next and for sure the ILCU can no longer be trusted as a central treasury manager no matter what it says it will no do. It will take a new manager, established under legislation, supervised by the credit union regulator as a credit union entity, before a satisfactory solution has been achieved.

The second waste of time is the so called capital adequacy policy published this week. Where does the ILCU get off thinking it has a role in defining regulatory prudential standards for credit unions? Introducing risk weighted approach and rating system for credit unions is fraught with problems. The ILCU does not explain how it has arrived at risk weightings, limits or for that matter why a credit union with a higher level of regulatory capital is safer than one with a lower level – what constitutes the right safe level and why has not been explained. In fact the policy is a poor version of complicated models that seek to charge premiums for risky credit unions in pricing the cost of deposit insurance – thus limiting moral hazard risks. But the ILCU is quite on this aspect of its model – just how it proposes to force a credit union to achieve a higher rating is not stated. But it can be implied through what the ILCU is also up to. Firstly it wants to retain its stabilisation role – probably hoping its system will be approved which unlocks pricing and supervision of what it sees as its right to set and maintain prudential type standards. Being able to financially penalise or charge a risk premium for a poorer rated credit union provides leverage to force it to behave itself. But risk based premium pricing, allied to risk weighted capital adequacy and use of other ratios such as PEARLS or CAMEL is fraught with complexity and very difficult to implement even by the most professional of regulators. Just why the ILCU believes it has the competence to develop such a system and make it work is an obvious question to be answered. Which brings up its IT data base project – the only reason to have a central MIS of the nature proposed is so that you can monitor and control. It appears the ILCU has yet to put forward a cogent rational explanation demonstrating the business benefits of its project which is clouded in project management speak.

Finance officials have slipped out draft stabilisation legalisation which amounts to a cack-handed cock up. It allows for more than one scheme and the regulator is to set conditions for approval etc. Instead of designing a proper stabilisation system and specifying its legal form, governance and funding arrangements, Finance has left this to “groups of credit unions” and the regulator. Once again permanent government has dropped the ball. (more on this later !)

At almost the same time RCU announced a Regulatory Reserve Ratio of 10% to Total Assets. The typical current profile is 11.5% total reserves to total assets of which 8% is statutory and 3% other type of reserves. The banking equivalents are statutory = Core Tier 1 and other reserves = hybrid non-core Tier 1/Tier 2. From Sept next they will have to provide for 10% of Total Assets (net of bad debt balance sheet provisions) in statutory capital (similar to core tier 1 equity). The ratio is not calculated on a risk weighted basis and other reserves will not qualify as they are distributable and or restricted a bit like Tier 2. As most if not all credit unions are below the 10% (average is c8%) they will have to switch funds to statutory reserves. But many will be short and will have to fund from annual surpluses – where they generate them. The RCU is cutting slack and allowing those who fall short to reach the target 10% by Sept 2011 (2 years) as follows : 8% by 09/09, 9% by 09/10 and 10% by 09/11. This group of credit unions may have their business activities restricted. He does not mention what happens if a credit union has less than 8% by September next.

The RCU is not using a risk weighted asset (RWA) approach as the ratio will apply to total assets without adjusting for risk. International equivalents require 8% on RWA which is c10-11% on non RWA basis. Australian CU’s are operating at 15-21% RWA and c12-14% non RWA basis. Similar levels are found in the US – unadjusted for a counter cyclical capital.

The move is in direct conflict with the ILCU capital policy. Just who is the regulator ? In the space of a month the ILCU has published a capital policy (prudential regulation) and a minimum competence regime (prudential supervision) while the Regulator has produced a Regulatory Reserve policy together with a fitness and probity impact analysis ...are we seeing the hidden conflict between a trade body and regulator begin to spill over ?

Ireland needs a vibrant viable alternative to main street banking. It is high time that influential credit union leaders, both directors and managers took the initiative and demand that Government acts. ILCU rhetoric won’t put a single cent into credit union reserves or cash balances. Any credit union can be allowed to fail, none are that important not to. But the sector is of systemic importance and cannot be allowed to spiral into a chaos. There should be a credit union commission to tackle the crisis and reform the sector. Government should establish a commission, get the right people on board and let them get on with it.

Naas Credit Union comments on regulatory communications

2009-03-12T01:20:00.004Z

Naas Credit Union features in this years AGM bloopers. Having made provisions of €1.2m for losses in investments it should never have made in perpetual bonds it said:

....express [my] disappointment at what Mr. Logue, the Credit Union Regulator, has been saying in public forums over the past year or so. While I am sure what he says applies to some Credit Unions, unfortunately he appears satisfied to tar all Credit Unions with the same negative brush. Firstly, the criticisms do not apply to Naas Credit Union. Secondly, I believe it is very inappropriate for someone in his high profile position to be airing any of the movement’s undoubtedly dirty linen in public. He should deal with the Credit Unions in question one by one and certainly not in public.....

Where is the Deposit Guarantee Legislation ?

2009-03-11T01:02:00.002Z

Something strange is afoot. The €100,000 deposit guarantee remains to be enacted despite legislation having been drafted as long ago as last October. The ECB has already provided an opinion which is probably based on the heads of the new Bill. http://www.ecb.int/ecb/legal/pdf/en_con_2008_69_f_sign.pdf

It seems one of the delaying factors is how to deal with the thorny issue of credit unions. When announced as a crisis reaction to stave off fears of a rational run, Government promised to include credit unions savers and their €11.5bn. But the promise was conditional on a “savings protection scheme”. Now this is a bit odd as it seems a guaranteed payment to savers in the event of the failure of a credit union is a requirement since 2001 when the part of the laws governing credit unions was enacted. The Act itself dates from 1997 and requires credit unions to participate in such a scheme as a condition of their authorisation to carry on business. As it stands every credit union in the state is currently in breach of the law and has been since 2001.

It gets even stranger. Before last September, when not one euro was guaranteed, the Department for Finance said that the regulator was trying to get the ILCU to agree to its scheme being approved under the act in line with 1995 EC Directive on deposit guarantee schemes (called DGS for short). This is very odd as the Directive said that if a scheme is not government backed then its providers must have the financial standing to be capable of providing a guarantees as good as if not better than a government guarantee scheme and it must be regulated by the appointed regulator( in this case the central bank). The ILCU may have a little fund of apparently €110m but it hardly has the financial resources to back a guarantee of €100,000.

So it seems the Governments new scheme for €100,000 will fit the bill in providing a guarantee when a credit union fails. So why all this talk that its guarantee scheme will act as a “backstop” to an approved credit union savings protection scheme? Does this mean that credit union savers will have to jump through some hoops before they are entitled to payment under a guarantee?

Now the ILCU Savings Protection Scheme is not approved or regulated “savings protection scheme” and the governments promise of a guarantee fits the act – so why does there have to be a half-way hotel? What does this reference to savings protection actually mean? Well it doesn’t refer to the ILCU one which carries the same words but is not the same thing – although the ILCU tried to have its recognised in law in 1997 which is where the wording got written into the act. It’s played fast and lose with the words over the years leading its credit unions into believing it provided a guarantee – even today some credit unions claim the ILCU provides a guarantee.

Well it just so happens that modern DGS also include for emergency supports for troubled but viable banks and credit unions. Sometimes it’s better to help the firm survive rather than let it fail and then pay out. But the problem is a big bank mechanism will not work for 419 odd mini-banks (credit unions). Enter the need for the half-way house called a “savings protection scheme”. It’s a right mess and only one that could have been created by Fianna Fail policy of appeasing the ILCU with its rejection of a state guarantee in favour of its private fund.

Smack bang in the middle of a financial crisis Finance was caught short and has been scrambling around trying to cobble together a solution ever since. Yet the regulator looked for a credit union DGS in early 2006 and Joe O’Toole published his Bill for one in early 2007.

As it now stands the guarantee is conditional on this “savings protection scheme” concept that has not been explained and which is a misnomer to fit in with existing credit union legal terminology- It’s a right mess.

The Enemy Within

2009-03-07T01:07:00.007Z

Volunteerism is unselfish giving without financial compensation that benefits both the needs of people who are served and the need of people to be of service. This human need to be, “of service to others” used one of mans most powerful business systems – banking or to be more precise the creation of credit. It was the genesis of powerul force that enriched the lives of odinary people in so many different ways.

It is this ability to use money in the form of credit - use it today and pay for it tomorrow that creates and sustains whole societies. When it is threatened, as it is now, only then is its power to do well truly understood. And those who were trusted to protect did not are rightfully being held to public account.

Those that have abused the trust, people rested in them, to run credit insitutions safely and soundly need to be rooted out. No more so then many of the current generation of voluntary credit union directors.

Their role as community trustees was to make sure that the credit union they willingly agreed to watch over was able to continue doing what it is supposed to do.

Many have delivered but far too many have not. Far too many turned up to do well and were dominated, cajoled and bullied by clever people who get their kicks from “being important and being in charge”.

Credit unionists talk of the Dominant Director. Spotting them is easy. They have are the ones that have been in influential positions for far too long, manipulating rules they know better than others. Their power is derived from being good administrators and in depth knowledge of arcane rules. In short they arrange to paint the wall so they can enjoy the paint drying.

They are most dangerous when they elbow their way into the top spot. Here they thrive as their position and title allows them to abuse credit union resources. When challenged they use “rules” as their defence and employ lawyers to defend their aggrieved honour.

Irish credit unionism has allowed a generation of dominant directors hold power. Their hegemony, encapsulated in trade body politics resulted in the loss of millions of community capital. They are a generation who have squandered local community financial and social capital they agreed to mind and enhance.

A cadre of dominant directors may take the credit union movement down with them. Bad things happen when good people stay silent. It is time for the good people to find a voice and defend credit unions from the threat from within.

Credit Unions Face National Turmoil

2009-02-26T19:19:00.005Z

The game is up for Irish credit unions as the scale of losses is unveiled in the public domain. Long used to hiding behind rhetoric, the ILCU has been rendered mute - silenced in two revealing sets of figures.

Credit union problems have exploded on the front page. 115 are operating at a loss for their first quarter and unlikely to turn a profit this year, with another 123 sailing close to the red ink. Oops! all four wheels are coming off.

Some are going to fail and others have been told to stop lending. Last year loan arrears jumped 22% hitting a whopping €513m , provisions weighed in at a hefty €284m or 4%. Believe it or not! Write offs were only €50m! Oops! the long awaited bad lending workout has started.

But this isn’t the half of it as credit unions had refinanced a whopping €272m raising the bar on impaired loans to €785m in 2008.

Oops! it’s not over yet …..The other bit called investments is reckoned according to one astute observer to be another €345m bringing the grand total to €1.13bn or 7.7% of total assets.

Just how bad these figures will finally finish up at is anyone’s guess. My guess is the good old unions will realise at least 10% loan write offs if not higher.

It seems that some are taking the pain early. I have seen one or two even write down the value of their buildings as their new auditors make their standards known. High street commercial property is down about 50%. Some of the bigger credit unions sank their entire reseves into new iconic buildings that are empty most of the week.

Meanwhile back in Mount Street things are not looking so rosy. Rumour has it that requests for help from cash starved credit unions are being declined. Oops!...seems as if the good old savings protection scheme fund is not as liquid as it should be.

The ILCU annual Beano, its accounts, are showing the weakness of its financial affairs that blows the notion it has the financial muscle to prevent credit unions from failing. Rather it looks ominously like it will do well to survive the results of its own aggressive investment strategy. Declaring €5.7m in investment losses on a portfolio heavily weighted to marketable securities is quite something else when the world and its mother knows what happened in 2008. Maybe it thinks credit union directors will only look at the colour pictures. I suspect that accounting flexibility is being used in the "held to maturity category" and values reflect maturity rather than current values. Then again maybe it has managed to do what no one else has. Then again pigs might fly.

More challenging will be the capitalisation call from ECCU and where the ILCU gets this money from. Up North it is believed to be busy talking up the value of credit unions paying premiums years in advance. Then again it does hold premiums on account feeding them to ECCU on the drip and earning a nice return to boot.

This brings up another strange issue. ECCU is a regulated and taxed entity. ILCU is unregulated and enjoys income tax free status. Nice one if you can get it. Now ILCU acts as an agent for ECCU. But ECCU has only one staff member so how is it managing its operations? Well its operations are managed under agreement with ILCU to whom it pays commission which is of course a cost. So ECCU pays income to ILCU which is tax free in its hands. ILCU in turn capitalises ECCU with guess what – yup the very same money ECCU has paid it, less a bit to pay for administration costs.

It’s all nice and dandy until ECCU needs more capital which seems to have happened with the unexplained losses on investments of €4m odd.

So what’s the real story? Well if you strip out ECCU and SPS income and costs and focus on the core business it evaporates before you eyes. That’s right. The core business ain’t paying its way by a country mile and then some. Apart from its never ending supply of rhetoric, the only asset the ILCU has is its headquarters building – a jaded near worthless pile, worth about its written down book value. The return for its 510 odd members massive investment is a big fat ZERO, a few glossy magazines and two websites.

As it faces the turmoil of credit union failure the ILCU should recall an epoch when it threatened to bring down a government. The same party remains in power today and recalls how a deal made was broken and how a government nearly fell. Double Oops!

Minister Brian Lenihan has told the Regulator to issue a code on loan arrears to credit union as the latest attempt to garner support for longer lending limits appear to have foundered.

Bottom line is the problems been stored up for years are now all popping up at the same time which not such a bad thing as it may finally act as the calalyst for change.

ILCU SPS Rhetoric To Come Unstuck in 2009

2009-02-10T13:21:00.002Z

The Irish League of Credit Unions needs to face reality. In proclaiming credit unions safer than banks and implying it can always prevent a credit union failing, it risks being hoist on its own pétard. A sovereign state may well prevent failures but surely not an unincorporated trade association, operating an unregulated informal bail out fund. Yet ILCU claims its savings protection scheme most recent bail out was similar to the British Government’s bail out of Northern Rock. As many of its members are struggling in the wake of global and domestic crisis, its resolve may be sorely tested.

A gaping hole in the credit union financial safety net was closed last September when Government fearing a general run on deposits increased the deposit guarantee limit to €100,000 and included credit union savers under its Deposit Protection Scheme. However there’s a catch as Government says the guarantee is a “backstop” to an approved credit union SPS, ambiguously juxtaposing “Deposit Protection” with “savings protection” continuing it seems to accommodate trade body self-interest to the detriment of the public good.

Backstop, means the financial safety net remains incomplete and missing two critical “stabilisation” elements without which governments savers guarantee is a damp squib. The missing elements are a system to provide emergency liquidity and a system to inject temporary or long term capital. Both can be a function of an integrated deposit insurance system such as that designed in the O’Toole Bill or can sit in an independent regulated stabilisation entity complimenting a deposit guarantee scheme. The US uses an integrated system and Canada the complimentary model.

Standing in the gap is ILCU with its tiny unregulated bail out fund of €110m, it claims is sufficient to support 525 credit unions, having €15.5bn in assets and operating in two differing legal and regulatory jurisdictions. Worryingly its fund may still be heavily invested in high risk assets, including equities, debt instruments, and unit funds. As these asset classes tanked last year, ILCU would be very lucky indeed not to have lost money. If it has lost money, then its ability to deliver is highly questionable. ILCU “Group” accounts which are audited by PWC will be eagerly awaited this year.

To make matters more intriguing both ILCU affiliation fees and contributions to its fund are charged by many credit unions to their customers savings accounts without their written permission. It’s a practice no doubt consumer bodies will have something to say about. In all ILCU has been paid over €19m in SPS contributions and over €17m in affiliation fees since 2003.

ILCU remains rooted in credit unionist rhetoric, resonant of another form of unionism that at one time cried “no surrender”. Time will tell if it alone can prevent credit unions from failing or if it has been hoist on its own petard.

Regulator Warns Credit Unions

2009-02-10T13:01:00.002Z

The text of the regulators recent speech is produced here without comment for none is required:

Speech by Registrar of Credit Unions at Credit Union Development Association AGM (Feb 2009)

The financial and economic world which we now inhabit is a radically different place than that which existed when we met a year ago. Many of the old certainties are gone and we all have to adjust to the new realities which now exist and which will continue to emerge. The financial landscape is now somewhat analogous to the physical landscape which emerged a few years ago after the destructive Asian tsunami receded. Structures which once seemed impregnable lie in ruins and reputations have come crashing down. It is fair to say that the financial world has been changed irrevocably both nationally and internationally.

In speaking to you here today I have to acknowledge that my own organisation has suffered criticism as a result of the banking crisis. However, I think you would agree, in hindsight, that at all times we have acted in best interest credit unions and their savers.

One part of the Irish financial industry which has stood up better than most to the battering which the financial system has taken has been the credit union movement. While credit unions have not escaped unscathed from the global storm that has swept over the financial system they have, so far, stood up very well to the stresses. Despite the damage done by investment losses in many credit unions, the movement itself, taken in consolidated form, remains robust. However, I would caution that the movement is facing a year of unprecedented difficulty in the economy which will require credit unions to make significant changes in how they do business. But more of that later.

It might firstly be useful to examine the strengths underpinning the movement that have buttressed its survival in the teeth of the financial storm and perhaps also to look at where it may have taken a wrong course in some situations.

Strengths

The credit union model, based on member interdependence and mutual support is, to my mind, central to the strength of the movement. The ethos of self-reliance, prudence and thrift are, of course, an integral part of this model. The financial model arising from these underlying principles that is enshrined in the Credit Union Act (despite all its defects), is inherently robust. This is despite the fact that the apparent imbalance between funding from members, which is mostly on demand, and loans and investments which are not, seems to defy the laws of financial gravity. However, because of the checks and balances which are inherent in the model, especially those which moderate any tendency to a serious asset liability mismatch, (e.g. Section 35 of the Act) the model is inherently quite stable.

I believe that one of the key reasons for the strength and flexibility of the movement is a characteristic that cannot be described on a balance sheet. That is the fierce loyalty of credit union members to their credit union. I was very gratified to see that in the cases where credit unions were able to pay only a reduced dividend or no dividend at all for the year just ended, that members resolutely stuck with their credit union. In cases where serious losses or other problems arose this has also proven to be the case. This reservoir of goodwill or "Brand Loyalty" as a marketing guru might describe it, cannot be valued on a balance sheet but most definitely is the invisible pillar on which credit unions rest.

The dedication and skill of credit union directors and supervisors and in particular the sound common sense and knowledge of local affairs of such people, is undoubtedly a critical component of the strength of the movement. Professional managers have also played an important part in steering the movement to where it is today.

I mentioned the word prudence a moment ago in relation to the ethos of the movement. I firmly believe that the historical culture of prudence in the lending function to which many, but not all, credit unions clung, also provided a stabilising sheet anchor which kept the ship steady.

You could be forgiven for thinking that I am saying that the credit union movement is indestructible. This is clearly not the case for any industry, and the speed with which once household names can collapse has been amply illustrated over the past few months.

Threats

It is important to note where the movement has suffered damage in recent years but it is also now vital to look forward in an attempt to anticipate the threats of the future. It is not an exaggeration to say that the Irish economy has suffered a dramatic slowdown. Business collapses, job losses, cutbacks etc. are at a high level.

Credit unions should prepare themselves for an extremely difficult year in managing their affairs. Unprecedented pressures can be expected in the lending and investment functions and credit unions will need to manoeuvre carefully to maintain their stability and to protect their members' savings. Consequently, this economic slowdown must also be matched by an appropriate application of the brakes in credit unions, where necessary, in the areas of lending and investing, so that a runaway situation can be avoided. A prudent application of the brakes as the road descends is preferable to waiting until it is too late to avoid going off the road when a sharp bend is encountered.

Investments

Credit unions can expect further losses on investments in 2009, particularly those made before October 2006 - the date of the issue of our guidance note on investments. It is likely that further losses could arise from perpetual bonds, the Central Treasury Management Fund and equity based products. Credit unions should prepare for these losses and should try to anticipate the likely effect on solvency and liquidity. It is particularly important that very close attention is paid to the availability of liquid funds. Unless there is absolutely no risk to future liquidity, credit unions should limit their lending to a conservative percentage of their cash inflow on a monthly basis. It is no longer safe to assume that a liquid market exists for all investment instruments (other than bank deposits). Some investments, while retaining their inherent long term value, may now be difficult to realise at short notice.

Our circular of 13 January requires credit unions to give priority to the holding of surplus funds in liquid form. I know that some credit unions will consider that such a requirement is unreasonable due to the present prevailing low interest rates. However, we take the view that when an investment is being made that the decision pyramid must always prioritise capital security and liquidity over return. The chasing of return by credit unions in the past has been akin to a desert traveller chasing a mirage and this has led some credit unions into the quick sands. Please, therefore, beware.

With regard to the boards of those credit unions which have suffered investment losses, I would say the following - Promises about investment returns that appear to be too good to be true are, generally, just that. You should always read all of the investment contract material carefully and seek professional advice about its content and conditions prior to making any decision on such a matter. You should rely only on the written contract and not on verbal assurances provided by the broker or product producer.

Lending

In common with other lenders many credit unions drifted away from the strict lending criteria which traditionally set conservative limits to loan approval amounts on the basis of a member's income, savings record and local standing. In addition, some credit unions ventured into business lending or even project finance, not always with a successful outcome.

Consequently, arrears in credit unions have been rising and this trend needs to be carefully controlled and reversed. Loan repayments including interest, constitute the most important cash flow source for most credit unions. Loan advances represent the largest channel for the outflow of liquidity and these must be carefully controlled.

Credit unions, especially their credit committees can expect a sharp increase in the demand for loans from existing and new members. It is of particular importance that the credit committee should be given clear monetary limits on the total funds available for the granting of loans, bearing in mind the availability of liquid resources. Close monitoring of liquidity inflows and outflows in the lending function must take place on a weekly basis. The extent to which loans may be made must be strictly related to the intake of cash from borrowers, and investments, adjusted for savings movements. Each credit union should examine its own cash flow to determine a safe rule of thumb in setting limits for the approval of loans for the credit committee.

We have now introduced monthly reports for selected credit unions where we believe liquidity is lower than normal so that we can monitor such situations. Such reporting will be extended to other credit unions, as necessary.

To those boards which have been engaged in the provision of loans for purposes and for amounts which would never have been regarded as normal for the business of a credit union, I have this to say. Please stop trying to be banks. Borrowers have a choice of banks from which they can borrow. Lending for commercial property, project finance or main line business activity is not the business of credit unions and is not in the interests of members.

Taking Stock

There is no reason why credit unions cannot survive and thrive in the present financial storm. There are however, a few provisos:- Liquidity is now king and the focus of day-to-day management must be to ensure that adequate liquid resources are always available for operational purposes. All surplus funds must be held in liquid form. - Lending criteria must become more restrictive and should be based on carefully researched criteria and on conservative estimates of the ability and commitment of the potential borrower to repay a loan.- Strict cost control must be implemented. Capital expenditure (e.g. on premises) must be carefully evaluated and curtailed unless strictly necessary.The rights of savers must be prioritised over those of borrowers.

A Bad Year gets Worse as Credit Unions fail to pay dividends

2008-12-18T10:02:00.002Z

The penny is begging to drop. 2008 was a bad year for the credit union movement. 2009 will be worse.

At least credit union savers are now protected up to €100,000. But this won’t stop them taking their money out of financially damaged credit unions. If credit union leaders believe for one minute that Government will ride to their rescue, they better think again.

Over 20 credit unions ended 2008 unable to pay a dividend and many more have suspended deposit interest payouts. This is unprecedented. If it happened to a bank, the regulator would move in to close it down. People who trusted their credit union with their savings have been badly left down.

Fearing a run on credit unions, the Financial Regulator has asked ILCU & CUDA to set up an emergency liquidity fund. Credit unions have no central treasury operations that could act as lender of last resort. The Regulator has suggested the League makes its SPS fund available. It was all too predictable.

Why? Investments in products credit unions should never have invested in have collapsed in value. Falling values of perpetual bonds, high risk unlisted shares, equities, marketable securities and retail investment products have all added to the credit union tale of woes. ILCU’s own collective fund the CMTF is showing losses of 12% as floating rate notes fall in value.

Dodgy loans were hidden for years by credit unions bad lending practices. Borrowers were allowed to leverage up their loans without repaying capital. The credit union loan behaved as credit card debt with ever increasing top ups and only minimum payments to clear interest and some capital. Then to manage arrears credit unions manipulated their loan books. Rolling over bad loans into new ones hid the problem. Worse still, poorly protected IT systems were abused. Credit unions would lodge €1.00 to a delinquent loan account forcing it out its delinquent category. They did so knowing that this would prevent the loan having to be provided for.

Add to this heady mixes of losses are loans given to migrant workers. Tens of thousands have headed home leaving their debts behind them. Many credit unions are nursing loans they will have no option but to write off in full next year.

The net effect is hundreds of millions in investment losses and loan write offs have been or will have to be written off. The regulator has warned of these risks for years.

The ILCU will be seriously challenged to respond with its SPS fund. It is likely the fund has also been invested in loss incurring assets. At one time it admitted to having a 10% exposure to perpetual bonds.

Meanwhile new audit practice notes issued this month provide robust guidance to credit union auditors. It’s quite clear that many who currently audit credit unions may think deeply about a continuing involvement given the onerous duties required of an auditor.

Regulator and Media Highlight Credit Union Investment Losses

2008-11-12T01:04:00.010Z

Both the Irish Times and Examiner have highlighted credit union stories in the past week that have highlighted the scale of challenges facing credit unions.

The Regulator, Registrar of Credit Unions, Brendan Logue has written of a need for liquidity supports and in a hard hitting speach once again highlighted credit union investments and lending as key issues.The content and tone of the Regulators message is once again robust and forthright.

Referring to loans he said "Lending for personal needs was the traditional purpose of credit union loans but in recent years loans have increasingly been advanced for business capital, project finance or even, in a small number of cases, for speculative purposes. Consequently, the lending model has changed substantially in some credit unions without a corresponding improvement in risk assessment capabilities and this has given rise to substantially enhanced credit risk."

Commenting on investments he said "the biggest change of all has happened due to the enormous accumulation of surplus funds which has developed over the past ten years.This change has had a negative effect on the financial model, profitability and ethos of the movement. Had these surplus funds been invested in a conservative and prudent fashion and held on behalf of members separately from the affairs of the credit union, the investment losses of the past year could have been avoided."

He went on to say "The idea that community funds should be invested in bonds or equities issued by institutions whose connection to local communities is at best unclear, or even in some cases in derivative products whose operations were not understood by board members, and in contravention of our guidance, is hard to understand. Such ill-conceived strategies have resulted in reduced profitability and dividends in credit unions and in a loss of credibility for the movement."

Getting to the heart of the matter he said "Many of you will be aware that my office sought for many years, to change what we considered to be an inherently risky and inappropriate investment strategy operated by credit unions. This process of reform proved quite difficult and did not receive adequate support from some groups within the movement. A lengthy and convoluted consultation process delayed the introduction of investment guidelines which were ultimately issued in October 2006. When I used the words “investment strategy” I did so advisedly because what occurred in the area of credit union investments was not a series of random events but arose from movement policy. "

The Examiner carried a story of credit union losses of €700m in a article written by Bill Hobbs ex CEO CUDA who was responsible for the publication of its Call to Action report in 2006. Hobbs' estimates of investment and loan loss impairment were refuted by the ILCU not because they were inaccurate but because the ILCU maintains no one knows as credit union audited accounts have yet to be published this year. In an interesting radio tussle, in one programme an angered ILCU said credit unions were not exposed to the sub-prime crisis as claimed by Hobbs. In a later radio interview Hobbs said he had never said they were adding the ILCU should read his article in which he wrote credit unions were "more exposed to the global crisis, domestic property collapse and recession" where the global crisis had led to the collapse in financial assets credit unions had invested in.

The ILCU was at pains to point out that the average loan was small at €8000 for "household events and cars etc" and lending to business was only 5% of the loan book !

Yet larger credit unions average loan is over 100% higher than the ILCU stated average and they are quite proud of business lending which for many is much higher than the 5% suggested by the ILCU. For example one leading credit union was involved in court action to recover a business loan of over €1m and another mid-sized credit union admitted to breaching loan limits in advancing a €1.5m business loan facility. It appears that ILCU estimates of business lending may be a wee bit too low not least because in one category, social finance, it has claimed lending in excess of 10%.

Not that it really matters as bad debt provisions have been far too low for the past 5 years as many credit unions sought to maintain high dividends streams. In a highly unsual case one leading credit union increased its bad debt provisions by €1m not from operating income but by transfer from its reserves to meet resolution 49 provisions. In yet another no provisions were made at all for over 4 years despite a growing loan book.

It is yet another case of regulatory and media commentary highlighting serious issues where the ILCU has refused to face up a reality that the crdit union movement is facing a very real crisis.

ILCU creates political friction in Northern Ireland

2008-11-12T00:35:00.005Z

O dear, ILCU President Adair's posturing in Northern Ireland seems to have politically backfired as the ILCU has cheesed off both Sinn Fein and the SDLP.

Sinn Fein - Martina Anderson
Responding to ILCU claims that credit unions have been snubbed by the NI Assembly leading Sinn Fein assembly member said she was "disappointed at the sweeping accusation by Uel Adair that the 'Assembly has snubbed' the Credit Union Movement" she added that if he "was paying attention instead of using a scatter gun approach in his criticism he should have been aware of the consistent and persistent efforts of Sinn Fein in the Assembly to have barriers to Credit Unions ability to offer wider Financial Services removed..it would be nice of he could at least acknowledge the efforts that we are making and will continue to make in support of the Credit Union Movement"

SDLP - Mark Durkan (Party Leader and chair of the NI Assembly enterprise committee)
Durkan said he was equally "disappointed" adding that "people should not be given the impression that parties are not doing anything in the Assembly when the record and current business shows they are". His initiative he said resulted in "a formal enquiry into the very subject"

At a time when credit unions need all the friends they can get, going offside with influential politicians is hardly the right course to take. More so as Irish Times and Examiner articles highlight growing concerns over credit unions

Credit Unions are not safer than banks

2008-11-05T10:05:00.000Z

Make no bones about it, our recession is credit driven off the back of a property boom to bust cycle. With an overhang of unsold new homes of 50,000, house prices are predicted to fall by at least 30% by the end of 2009 from peak prices in 2006. This is a conservative estimate where analysts have no previous experience in which to ground their expectations. Unemployment is expected to double with upwards of 70,000 additional people signing on the dole and private sector incomes will contract as taxes are increased and discretionary income is slashed by struggling employers. Credit and savings growth will drop from 20+% pa to low of about 6%.

Credit unions despite what the ILCU has said are not immune from the effects of recession and global credit crisis. In many ways they are more acutely exposed than the troubled Irish banks and are far less safe than banks.

The global crisis has seen the collapse in financial asset values underpinning credit union investments in retail financial products. Already multi-million euro losses are being recorded across a range of products including the ILCU sponsored unit trust vehicle, the CTT, which has experienced a 10% loss of about €60m in FRN’s.

The loan to total asset ratio is key to understanding the leveraging effect of the global crisis as the lower the ratio, the higher the investment risk exposure to investment losses. Those credit unions having a low ratio and exposure to equity based products are likely to be experiencing large accumulating losses that will have to be accounted for this year. In all likelihood a significant number of low ratio credit unions will be unable to pay any dividend to their savers.

As far as lending is concerned, over the past 5 years or so, credit unions have been storing up a hard core of bad debt they have yet to write off. Loan delinquency levels, even under lax ILCU provisioning standards, have been the highest when benchmarked to mature credit union sectors elsewhere. Since the collapse of the property bubble, loan delinquency has worsened as borrowers begin to default on unsecured loans taken out to finance and furnish their new homes. As credit union lending is almost 100% unsecured, these loans are almost always the first people decide not to make repayments on. Furthermore many credit unions engaged in high risk commercial lending and speculative property development finance, two sectors experiencing melt down. Many of these loans are severely impaired where security, if any, has lost 40% of value. Some of the largest credit unions are faced with writing off multi-million euro business lending exposures.

Credit union lending is highly exposed to the impact of a worsening recession which is not predicted to wane until 2011.

It seems then that most if not all credit unions will be declaring investment losses in their accounts which for many will impact quite negatively on dividends and even reserves. As far as bad loans are concerned, credit unions should increase general provisions and start making the specific provisions needed to begin the process of write downs which must inevitably occur. The days of hiding bad debts are over.

ILCU Treasury Ambitions in Shreds?

2008-11-05T10:02:00.000Z

In what appears to be a rancorous divorce, ex-partners Davy and the ILCU are locked in a struggle for credit unions hearts, minds and wallets as they vie for control of credit union investment portfolios. Their eleven year partnership through which they co-manage a fund of €2.3bn ended abruptly as Davy withdrew, opting instead to focus on its relationships with individual credit unions. The partnership called Central Investment Management (CIM) comprises an ongoing fund of c€1.7bn in individual credit union accounts and a €600m collective investment scheme or unit trust called the Central Treasury Trust (CTT).

Whilst Davy has offered to continue to provide support until a new partner is found, its decision to end the relationship raises more questions than it answers. One is thing is clear the ILCU needs a new partner as it is neither an approved deposit taker or regulated investment manager.

On the 2nd October last Davy wrote to the ILCU formally confirming its decision to end its CIM relationship. The following day it announced its decision to credit unions including an assurance it would continue to business with them on an individual basis.

Beaten to the punch, the ILCU countered, claiming that it had requested Davy to resign. This claim was strenuously denied by sources close to Davy who expressed surprise and annoyance on hearing the ILCU had also urged credit unions not commit to doing business with Davy until a new partner is found. The old adage “when in a hole, first stop digging” may well apply as ILCU action could be construed as anti-competitive behavior exposing it once again to scrutiny by the competition authority.

The ILCU/Davy relationship goes back eleven years during which time funds under management grew from about €500m to €2.3bn. As credit unions lending lagged way behind savings growth, the CIM arrangement grabbed a sizeable share of the €7bn in excess credit union funds generating a lucrative income stream for its partners. In 2006 this valuable partnership seemed to have been cooper fastened when it launched a unit trust vehicle, the CTT, promising credit unions instant access to their funds without putting capital at risk. Last month credit unions were shocked to be told instant access would result in capital losses as the credit crunch had taken a sizeable €40m bite out of the €600m CTT fund.

Despite the sundered partnership, Davy remains open to dealing with individual credit unions allowing it to cherry pick rather than having to deal with all 430 credit unions under the CIM arrangement. As a significant number of larger credit unions have solid relationships with Davy they will ignore the ILCU memo which is something Davy is obviously counting on and the ILCU has every reason to fear.

A remarkable feature of the Irish credit union movement has been its failure to evolve central treasury operations similar to those found in the US and Canada where central credit unions (a credit union for credit unions) exist. Called “Centrals”, they are state approved regulated credit union entities providing the pooled liquidity and solvency funding services fundamental to a well designed credit union financial safety net. Davy decision to go its own way could scupper an ILCU long standing strategy to develop similar services for its members. Unless the ILCU retains its member credit unions support and find a new partner quickly its ambitious strategy will fail.

In the struggle for control of credit unions investments Davy appears to have upper hand as the ILCU hunts for a new partner so necessary for it to retain control over billions in credit union funds. It is a struggle that exposes a gap in the credit union safety net that may take Government and regulatory intervention to address as concerns grow over investment losses in the c€7bn held by credit unions in their investment portfolios. The concern is accumulating losses could impact on credit unions balance sheets, profits and dividends which in turn may cause liquidity and solvency problems.

Credit union boss in attack on banks

2008-10-05T21:29:00.004+01:00

ILCU President Adairs’ pugilistic commentary reported in today’s Sunday Tribune generated a headline “Credit union boss attack on banks”. Chucking stones around your own glasshouse springs to mind.

Like other bombastic proclamations of "credit unions are safer than banks", Adairs’ reported comments miss the mark by a mile and then some.

Just like banks, credit unions are "credit institutions"; defined as taking money on deposit from the public and making loans off their own balance sheet. The fact is credit unions are banks – co-operative banking operations having a differing ownership structure to joint stock banks.

The Government €400bn guarantee was not extended to credit unions as they are too small to matter. It has absolutely nothing to do with “credit unions not wanting to be associated with bankers” as Adair would have people believe. In reality if the government extended its guarantee to cover credit unions the resultant cost and impact of regulatory scrutiny would cause severe problems both for the ILCU and many credit unions.

"We do not give out mortgages so we are not exposed" says Adair.The dogs in the street know of credit union lending to people in buying their homes. In the banks case mortgages are secured unlike the mountain of unsecured credit union property related debt. Credit unions do not have a clean pair of hands, they willingly and knowingly participated in fuelling the property bubble and are exposed to the consequences of its explosion.

He is right in saying credit unions "do not get funding from the international money markets". However it is credit union assets and not their liabilities which are hugely exposed to international money and equity markets. For example Perpetual bond, ISTC and CTT losses amounting to over €125m.

Adair makes no mention the fact that credit union deposits with Irish banks are now fully guaranteed by the Government. So if a guaranteed bank fails, credit unions are fully protected. If, as Adair says "credit unions don’t want to be associated with banks" then surely they should put their funds on deposit with non-government guaranteed deposit takers, close their bank current accounts and cease using the banks money transmission system.

Once again the SPS €110m (now called a stabilisation fund) is touted as part of savers "triple protection". It may have been in normal times but is hardly the case today.

Adair says credit unions “have to hold reserves of 10%”. Many credit unionists will be scratching their heads wondering where it says they “have to hold 10% in reserves” when all the *law requires is a 10% pre dividend allocation from whatever surplus is generated.

Talk is cheap and paper never refuses ink but eating humble pie is something altogether different. The ILCU may end up eating its words if the government or its guaranteed banks are ever called on to bail out credit unions.

http://www.tribune.ie/business/news/article/2008/oct/05/credit-union-boss-in-attack-on-banks/

*45.—(1) A credit union shall establish a reserve (to be known as its ‘‘statutory reserve’’) by allocating in respect of each financial year not less than ten per cent. of the surplus funds of the credit unionfor that purpose.

Governments €400bn shores up Irish Banking System

2008-10-01T00:01:00.005+01:00

Governments €400bn guarantee of 4 Irish banks and 2 building socities was sensationally triggered overnight in response to the collapse of the banks shares prices on Monday. The six are Bank of Ireland, AIB, IrishL&P, Anlgo Irish Bank, Irish Nationwide and EBS Building societies.

Even with the short selling ban, international investors were wholly unconvinced that Irish banks were as safe as they claimed to be. At close of business Monday it was obvious that unless emergency action was taken by government the game would be up for one if not two of the four quoted banks on Tuesday as instititional depositors were already engaged in heavy withdrawals.

Had one of the banks failed then the game was also up for credit unions who have billions on deposit with the six credit institutions now afforded protection under the new state guarantee. It would have been all over for credit unions within days.

Today credit union deposits in these six institutions are fully guaranteed by the state and credit union savers have a €100,000 deposit guarantee. However neither credit union assets or liabilities are guaranteed by the state.

Irelands property related debt mountain is going toxic which is codespeak for real financial hardship for ordinary people and small businesses who are defaulting on their loans as a result of an official economic recession.

The states €400bn guarantee is directly related to international concerns that Irish banks were far too exposed to property related lending.

Credit unions are also heavily exposed to property related loans. Many people have unsecured credit union borrowings used to finance what are now unaffordable lifestyles. They borrowed to part finance homes that have lost upwards of 30% of their value with no sight of a bottom price. As businesses downsize or fail thousands are losing their jobs many of whom are traditional users of credit union debt. Anecdotal evidence is one of increasing loan delinquency that has yet to feed through in credit union bad debt provisions and loan write offs.

Experience tells us people will continue to make their mortgage and utility payments but will default on unsecured loans. Just how much of the credit union loan book is exposed to this scenario is hard to quantify - it is an exposure credit unions must understand and be transparent about now. Bad lending practices such as refinancing dodgy debt, manipulating loan arrears and other tactics will backfire dramatically as regulatory scrutiny of all lending institutions will intensify.

The credit union challenge is honestly dealing with bad loans and lending safely in a recession. Liquidity may not be a big issue but solvency and the ability to safely leverage will be one of the most closely watched capabilities of any credit institution large or small. The danger is credit unions will be tempted to relax lending criteria in response to real member hardship. This could exaserbate credit risk and impair what is already a thin solvency base.

Crisis continues to effect ILCU Central Treasury Trust

2008-09-29T11:21:00.005+01:00

The good news of the apparent extension of the deposit guarantee scheme with its increased limit of €100,000 to credit union savers came at almost the same time as the Sunday Times highlighted worsening problems with the ILCU Central Treasury Trust.

The unit trust is exposed to floating rate notes that are currently trading below par in what is a highly illiquid market. Whilst capital should be repaid at maturity by a creditworthy borrower on what are normally highly liquid assets, the continuing crisis has impacted adversely on their open market value.

When introduced some observers questioned its suitability as a credit union treasury vehicle pointing out that as an open ended collective investment scheme it could not of itself provide a capital guarantee.

In March 2006, the ILCU said “the objective of the Central Treasury Managed Fund at all times is to provide credit unions with a competitive rate of return and instant access to their funds without putting the capital value of their investment at risk. The primary investment goal is always to prevent any loss of capital and this has never occurred to-date in the Ongoing Fund” (ILCU March 2006)

But instant access could result in a capital loss if activated today. As the CTT is priced below par and has been since at least December 2007, credit unions will now have to show losses in their annual accounts this year. Current estimates put these at c€40m at the current unit price.

What is not known is the scale of losses being incurred on other credit union investments, how badly liquidity is impaired and the effect this will have on credit union accounts, dividends and solvency.

The credit crisis is far from over and a deposit guarantee whilst a comfort to savers, is hardly a comfort to credit unions exposed to investment losses and impaired liquidity.

The Backstop and the SPS

2008-09-27T00:59:00.019+01:00

There's nothing worse in the middle of a crisis than political ambiguity. Governments' increase in deposit insurance coverage to €100,000 and the inclusion of credit union savers for the first time has been somewhat confused by its reference to the guarantee being a backstop to an approved SPS.

"The Registrar of Credit Unions in the Financial Regulator is working closely with ILCU to approve a reform to SPS. It is expected that these discussions would conclude shortly.
It is intended that the guarantee that has now been announced for credit institution savers would act as a backstop to an approved SPS scheme for credit unions." Minister for Finance 20th Sept '08 http://www.finance.gov.ie/viewdoc.asp?DocID=5466

How the Deposit Guarantee Works
Legislation has yet to be produced and enacted to give effect to this credit union arrangement. Until it is, credit union savers are not as protected as the ILCU would have them believe they are. See here: http://www.irishcuvoice.com/2008/09/ilcu-cockcrow-lacks-authenticity_22.html

It is not a direct government guarantee. It's a guarantee that compensation will be paid out of the deposit guarantee scheme. This scheme holds a fund (deposit account) to be used to settle depositors claims arising from a defaulting credit institution (credit union). If the fund runs dry it can be topped up by the Central Bank who afterwards will get their money back from the members of the scheme. This means that credit institutions foot the bill when one defaults. Not the Government. But in cases of severe shock the Central Bank may not look for its money back for some time , if ever. In which case the taxpayer foots the bill.

So what's the Backstop to the SPS about ?
We don't know yet. But there are some hints that may help.

Stabilisation is not Deposit Insurance/Guarantee
The ILCU "SPS" is a stabilisation scheme. It never was a deposit insurance scheme and never offered a guarantee. This has come as a shock to the many credit unionists who thought it did and reacting to large deposit withdrawals over the past few weeks. For example listeners to LiveLine were told by one credit union director credit union savings were guaranteed, when they weren't at the time.

Stabilisation is a credit union concept where originally credit unions clubbed together and established a fund to provide discretionary assistance to a credit union in trouble.Typically funding takes the form of guarantees, liquidity or solvency supports. In some jurisdictions, where such schemes are subject to legislation and regulatory oversight, a workout plan and its funding require regulatory approval and the approval of a deposit insurer. Stabilisation schemes dissappeared in the US in the early 70's when they were replaced by credit union deposit insurance. They continue in Canada but they are subservient to provincial and state deposit insurance objectives.

Deposit Insurance compensates savers following credit institution default (Deposit Guarantee) It may include for risk minimisation assistance where the deposit insurer, usually a government body, makes assistance available subject to an agreed business plan that demonstrates the bank etc. has a viable future. Private deposit insurance was discredited in 1992 when Rhode Island's private scheme (RISDIC) collapsed triggering the closure and state bail out of its credit unions. See here : http://www.irishcuvoice.com/2008/03/deposit-insurance-and-irish-credit.html and here http://www.irishcuvoice.com/2007/10/echoes-of-rhode-island-ilcu-sps-reforms.html

Legislative basis
The Credit Union Act provides for regulatory approval and regulation of savings protection schemes (section 46). Its wording may be broad enough to cover both deposit insurance and stabilisation schemes. Credit unions must participate in an approved scheme since 2001. As a scheme has not been approved to date, every credit union has been carrying on business in breach of the law.

The Financial Regulator has set out conditions any scheme will have to meet if it is to be approved. The ILCU has sought approval of its SPS and "discussions" have been ongoing since 2003 and have broken down at least once. Essentially the Regulator wants to approve an independent scheme, with its own independent board, staffing and funding which is open to all registered credit unions to join. It also included a conditio for the scheme to provide a deposit guarantee. The ILCU has been unable to agree to this. Presumably the guarantee condition is now redundant.

The O'Toole Bill, published in February 2007 in the Seanad, legislated for Irish Credit Union Savings Protection Company; a statutory deposit insurance/guarantee scheme including stabilisation provisions for credit unions. http://www.oireachtas.ie/viewdoc.asp?DocID=6992&&CatID=59&StartDate=01%20January%202007&OrderAscending=0

The Bill was withdrawn during its second stage hearing in March 2007 as Government said the Financial Regulator was working closely with ILCU to approve a reform to SPS and expected that these "discussions" would conclude by the end of March 2007. Discussions did not conclude in March 2007 and haven't concluded since.

Approving a reformed SPS - what it could mean
A reformed SPS could work as a stabilisation scheme for its members. Should the scheme managers decide to provide support to a credit union, the regulator could approve subject to it being satisfied the stabilisation plan would work.

Should either the stabilisation plan fail or the schemes manager decide not to provide support (the credit union could not survive even with assistance) then on default the deposit guarantee scheme and its compensation to savers would apply. This could be what is being termed the "backstop"

The question of membership is an open one. The scheme could be compulsory or voluntary. The regulators conditions for approval require a stabilisation scheme to be open to all credit unions regardless of affiliation to or membership or not of a trade body.

What is uncertain is whether or not the deposit guarantee would apply where a credit union does not participate in an approved SPS. It would be an incomprehensible decision if it did not.

Broader policy dimension

The regulation and supervision of credit institutions, including credit unions is the responsibility of the Financial Regulator and no other body. Deposit insurance for credit union savers as with banks depositors must be responsibility of the Central Bank and no other body.

A credit union stabilisation scheme should be approved, regulated by the Financial Regulator and also subject to Central Bank oversight as a deposit insurance provider. It may well be the case the Financial Regulator requires a stabilisation scheme to plug a significant gap on the credit union financial safety net. That gap is the provision of emergency liquidity supports similar to the lender of the last resort function of the central bank.

It is widely accepted the credit union movement must rationalise. It may also be the case the RCU considers that credit union rationalisation (mergers) will need to be funded through stabilisation supports. Canadian credit union stabilisation funds are regularly used to fund mergers where a troubled credit union is taken over (merged) by another.

Elsewhere stabilisation powers are subject to robust specific legislation and are regulated by state bodies. One recent media report stated the Financial Regulator is looking for a statutory SPS. http://www.irishtimes.com/newspaper/finance/2008/0926/1222374594810.html

A key policy consideration is the legal certainty, and statutory status of any approved stabilisation scheme. It has long been the ambition of the ILCU to evolve as an in-system regulator similar to some Canadian Central Credit Unions. As the Financial Regulator will be more than aware of the legislative and regulatory basis underpinning Canadian Central,. it's requirement for statutory recognition of any Irish stabilisation scheme is a sound and prudent position. See here for a more detailed treatment http://www.irishcuvoice.com/2008/08/canadian-expose-debunking-ilcu.html "Canadian Expose Debunking the ILCU Pipedream"

Stabilisation scheme funding
Stabilisation funding could come from a fund established by an SPS scheme manager or funded from the Central Bank deposit guarantee account.

If the fund is with the stabilisation scheme manager, then it could also be used to fund merger costs under a workout proposal. In this case SPS funding would be separate to Central Bank deposit guarantee funding.

In addition or alternatively, with the approval of the Financial Regulator (RCU), the stabilisation manager could request stabilisation funding from the Central Bank deposit guarantee account to be repaid at some future date. For example some Canadian central credit unions may call on provincial deposit guarantee schemes for stabilisation funding where they are empowered to do so under state legislation. Canadian Centrals as legislated and regulated credit union entities are empowered to operate stabilisation funds. (see here for more in depth discussion on the role of Canadian Centrals http://www.irishcuvoice.com/2008/08/canadian-expose-debunking-ilcu.html)

What would happen to the existing SPS fund?
It could either be (a) retained as a fund by an approved stabilisation scheme manager or (b) used to fund credit union contributions to the Central Bank deposit guarantee account. It depends on how stabilisation will be funded. Of course it also depends on ILCU ambitions and its member credit unions demands.

Is this possible to approve a reformed SPS under existing legislation ?
It would appear a stabilisation scheme, meeting the Regulators conditions for approval, could be approved under the credit union act. Such a scheme would be regulated by the RCU.

Compulsory membership could be required under the CU Act - however should the RCU approve the Central Banks scheme under section 46 then as all credit unions will be members of this scheme they would fulfil their legal requirement under the CU Act. On balance it is probably a good thing that all credit unions have access to stabilisation supports.

It also appears the Central Bank may be able to provide stabilisation type funding under deposit guarantee regulations.

Extending the deposit guarantee scheme to credit unions requires some amendments to existing legislation.

Funding Implications

Deposit Guarantee Scheme (The €100,000)
The current deposit guarantee scheme funding requirement is .20% of eligible deposits. This may be increased under the new limit. However it may not.

Assuming it is not increased: Credit Unions will need to deposit .20% (minimum deposit €24k) of all shares and deposits. It would appear on their balance sheet as an interest earning asset - deposit with the central bank. This differs from the annual funding fee charged by the ILCU SPS which is expensed to the P&L. As credit union deposits increase they would need to top up the central bank deposit to ensure it remains at 0.20%.

Stabilisation Funding
Depending on the SPS scheme approved and its funding requirements there are two scenarios:
(1) Stabilisation manager manages a fund.
In this case funding would be separate and additional to the deposit guarantee scheme. The question is what happens to the existing fund of €110m which would probably be sufficient as a stabilisation fund under normal market conditions.

It is likely the ILCU will want to retain the use of all or some of the existing SPS fund to continue to provide assistance to its Northern Ireland members. It has argued it needs to do so. What the ILCU does with the fund is subject to its members agreement. Resolving the future of the existing fund could see the ILCU retaining some of the fund for its NI credit union members under its existing SPS arrangements and transferring the balance to an approved SPS in the South.

(2) Stabilisation manager can call on Central Bank for funding. Here the the scheme manager may or may not have a standing SPS fund. It could call on support from the central bank deposit guarantee account. It could be the case then that credit unions may be required to maintain a higher level of deposit given their unique risk profile and stabilisation requirements.

Conclusion
The SPS saga that has taxed the credit union movement, for so long may be drawing to a close. The credit crisis has solved for a credit union savers guarantee. Government was forced to increase the limit to €100,000 and to include credit union savers.

Moral hazard considerations seem to have taken a backseat for now. Then again perhaps credit union moral hazard is what a "backstop" will be engineered to manage. An approved effective stabilisation system could enhance the credit union financial stability tool kit.

Whatever "backstop" means, the time for ILCU procrastination and foot dragging is over. There is far too much at stake. Its credit unionist rhetoric will not be accepted by a public that knows the credit crisis is far from over.

ILCU Proclamation lacks Authenticity

2008-09-22T22:56:00.008+01:00

It didn't take the ILCU long to roll out its rhetoric. Cheap point scoring in its press release today underscores its lack of authenticity in the face of the credit crunch. It loudly proclaims "Credit Unions Now Safer Than Banks for Savers". It is clearly out of touch with reality. It goes on to to claim "Credit Unions have double protection" implying they are "guaranteed".

The deposit guarantee does not apply to credit unions it applies to the savings of ordinary people should their credit union fail. Not for the first time is the ILCU playing fast and loose with the facts.

Minister for Finance, Brian Lenihan's announcement of an emergency measure to shore up savers confidence followed a week of rumour that some credit institutions were experiencing runs. His urgent response was to increase deposit guarantee levels to €100,000 and include credit unions for the first time. Just how this will be done remains to be seen.

Why did ordinary people panic? It was largely down to the Irish deposit guarantee being the lowest permissible under EU law since 1995. Yet Government got a clear wake up call last year when billions were exposed during the Northern Rock run. There was nothing preventing it from raising the guarantee level.

Just what were government and its officials doing since? The answer is it appears very little indeed. The Minister said deposit guarantee limits were only being considered by his officials since July of this year, fully 10 months after the Northern Rock crisis.

Last Saturday, Minister Lenihan was seen to being doing a good deed. In fact he was forced to react to a very real crisis that had nothing to do with callers to national radio programmes. He got lucky.

So too did credit unions as they too were experiencing heavy withdrawals as savers realised how exposed they were.

ILCU cock crowing from Mountstreet that "credit unions are safer than banks for savings" is naïve and downright silly. Naïve because credit unions are not safer than banks. And silly because it is cheap point scoring. It lacks the integrity and maturity required of a professional organisation in the middle of a crisis.

There hasn’t been a public run on an Irish bank in living memory. The last major run was probably the Great Munster Banking collapse in the 1820’s when the local economy contracted after the boom Napoleonic war years.

Yet, the last public run on a credit union was just over two years ago in Monaghan when the SPS failed to do its job.

Irish banks have access to Central Bank lender of last resort supports through which billions has been made available in liquidity supports in recent months. Credit Unions have no access to lender of last resort facilities. In the event of a credit union liquidity crisis the SPS, if it was made available, would probably run out of funds within days.

As far as solvency is concerned, banks and central banks can resort to various measures to shore up solvency. Credit Unions cannot and can only rely on ILCU largesse. In any event the SPS fund could supply a meagre €110m to a system that has over €14bn in risk assets exposed to rising loan delinquency and investment losses.

Claiming the average credit union deposit is less than €5,000 is highly selective use of data when hundreds of thousands of savers have significantly larger sums on deposit.

Above all Irish banks are too big to fail. No credit union has this standing. The simple fact of life is should one of the retail banks fail credit unions are in serious trouble : should a credit union fail none of the banks would be effected.

The ILCU might want to consider the Deposit Guarantee Regulations before its members credit unions repeat its banner headline : “Except with the prior written consent of the Bank, a credit institution authorised or formerly authorised by the Bank shall not advertise or cause to be advertised the fact (however expressed) that deposits or funds placed with the credit institution are protected by or through the deposit protection account.”

It might also want to address its errors of fact in its internal note to members. The guarantee is not a Government Guarantee but a guarantee under the DGS. The guarantee applies to the savings of eligible depositors (members savings accounts) and not the credit union. To state a credit union has double protection is simply wrong. It is also language that promotes moral hazard.

By all means welcome the guarantee, talk about the SPS, and get the facts right. But don’t claim credit unions are safer than banks.