Stabilisation Of The Credit Unions by Annette J Dunlea
Published In The Carrigdhoun Newspaper 3rd Dec 2011 p.11
Irish Credit unions are a vital part of the financial institutions here.Our credit unions are a volunteer run,member-owned organisation where people save and lend to each other at affordable rates of interest. They typically have a not-for-profit status and a strong community-based ethos.A common bond, based on factors like living or working within a particular area, determines who can join each credit union. All members have an equal input into the running of their credit union regardless of the level of savings they hold.Our legislation governing credit unions is the Credit Union Act, 1997 (as amended).The Act sets out the statutory framework within which they are regulated by the Registry of Credit Unions, in addition to outlining the characteristics of and restrictions on a credit union. Provisions of the Act also address the supervisory structure for credit unions, their management and the regulation applicable for the provision of services.There are also a number of Statutory Instruments applicable to credit unions.
The ILCU, which represents the majority but not all credit unions, had a deficit of €45.691 million in 2010 compared to a surplus of €15.394 million in 2009.There has also been a trend of smaller dividends being paid on average by credit unions. Last year, only 75% of ILCU affiliated credit unions paid a dividend to their members.Some individual credit unions are also confronting more challenging financial situations regarding their liquidity and solvency.The main regulatory focus has been on the quality of loan books and the levels of provisions and reserves held by credit unions. ILCU affiliated credit unions had an average liquidity ratio of 33.77% and an average solvency ratio of 116.8% at year end September 2010. In January 2011, CUDA stated its members have a liquidity ratio of 30% and a solvency ratio of 118%. The ILCU has seen its loan arrears increase in the last two years to an average ratio of 15.24% at year end September 2010.Individual credit unions reach investment decisions based on advice on investments from professional financial advisers to their boards.For ILCU-affiliated credit unions, losses on investments were substantially lower for 2009, with losses booked to year end accounts less than a third of the 2008 levels.The majority of credit union investments (70.2%) are in straightforward bank deposits, with 9.2% in bank bonds.
The sector has a successful history in Ireland but it has faced a changing economic, financial, regulatory and social environment recently. The key challenge for credit unions at this time is responding to these changes while at the same time retaining its unique co-operative character.It has been suggested that a measure of a successful credit union movement is that as it matures it provides the products and services that broaden the appeal of credit unions to all income groups.Given the large assets and loans associated with credit unions, the need for monitoring tools,such as solvency requirements, and the quality of the regulation are important. A key challenge for policy makers is that credit unions in Ireland today vary dramatically in size, membership,range of services and level of expertise.There is also an onus on the movement itself to ensure effective and proper functioning of credit unions. Research suggests that it could be more evolved. Reform and modernisation of the sector will thus be hugely important for credit unions themselves and their millions of members throughout the country.The current programme for government contains a commitment to review the sector:“We recognise the important role of Credit Unions as a volunteer co-operative movement and the distinction between them and other types of financial institutions. In Government, we will establish a Commission to review the future of the credit union movement and make recommendations in relation to the most effective regulatory structure for Credit Unions, taking into account their not-for-profit mandate, their volunteer ethos and community focus, while paying due regard to the need to fully protect depositors savings and financial stability”.The structure, business model and ethos of credit unions differ from the banking sector, presenting unique challenges in terms of their regulation.Future development of the sector is, however, not only dependent on legislation and regulation but also on the credit union movement developing a long term strategy.A key element of the plan for credit unions envisaged under the EU/IMF programme of financial support for Ireland will be “to obtain the necessary powers to promote a higher degree of consolidation in the sector through mergers,where appropriate, with government financial support if warranted”.
Irish credit unions should pay into a new fund to help “stabilise” the sector, in which 27 institutions are in serious need of capital, a Government-appointed group has stated.The Commission on Credit Union has called for enhanced regulation of the movement, as well as a greater emphasis on internal audit and risk management. Consolidation in the sector would allow for a more sophisticated approach in general.The commission found that 56 of the Republic’s 408 credit unions were in breach of a requirement to keep 10 per cent of their asset base in reserve, as of the end of June 2011. Within this group, 27 credit unions had reserves of less than 7.5 per cent.Reserves are designed to allow credit unions to deal with unexpected events, such as an excess of liabilities over assets.So, most credit unions have met the reserve requirements.It’s strong levels of liquidity within the sector is another positive.The commission’s report also shows that credit unions had €1 billion in loans that were more than nine weeks in arrears at the end of June, almost triple the level recorded in 2006.
Minister for Finance Michael Noonan said recenty that credit unions may need to be recapitalised by up to €1 billion, reflecting the precarious position of some. He said he hoped to publish legislation on regulation at an early date.Under the commission’s proposals, a stabilisation fund would be financed by the credit unions but governed by the Central Bank. It would be used to assist credit unions that are viable but are in difficulty, with stabilisation to include the provision of financial and technical advice as well as recapitalisation. In some cases, credit unions would be brought to the end of their life. The commission’s has just published it’s interim report and it has been warmly received by bodies representing the credit union movement.The commission is due to deliver its full report to the Minister for Finance by March, 2012.
There are 408 credit unions in the Republic of Ireland.Only 56 of all credit unions failing to meet minimum reserve requirements. 27 of them are seriously undercapitalised credit unions.There are €1 billion in arrears as of June 2011.€738 million are its total provisions as of June 2011.€215 million is it’s total bad debt provision as of September 2010.The Interim report published it’s main recommendations :establish a stabilisation fund which would be financed by credit unions to help secure viable institutions.The Central Bank should have resolution powers to bring a credit union’s existence to an end.Each credit union must appoint a risk management and compliance officer and develop an internal audit function.A prudential rule book should be introduced. Such an initiative would help to set out what is required of credit unions.
The Commission’s published recommendations are:
(1) that credit unions remain subject to the general deposit guarantee under the Financial Services (Deposit Guarantee Scheme) Act 2009 and that their financial contributions under the scheme should commence.
(2) a number of factors to be taken into account when assessing a credit union’s viability, including capital adequacy, loan impairment and delinquency, investment impairment, governance capacity and ability to restore capital reserves.
(3) that the resolution powers intended to be granted to the Central Bank under the Central Bank and Credit Institutions (Resolution) (No.2) Bill 2011 when enacted, should be considered for those credit unions that meet the intervention conditions or grounds set out in the Bill.
(4) the establishment of a steady state stabilisation mechanism for credit unions that are facing difficulties but are otherwise considered by the Central Bank to be ‘viable’. Stabilisation actions to be carried out by the Central Bank should include the provision of technical and financial advice,mandatory changes to governance structures, changes to the business and operations, and capitalisation of the credit union.
(5) stabilisation should be time-bound and any credit union that fails to comply with the conditions of the stabilisation process should enter the resolution process.
(6) the establishment of a statutory stabilisation fund, financed by credit unions and controlled and governed by the Central Bank. A statutory credit union stabilisation oversight committee should be established and should report its conclusions to the Minister for Finance and the Governor of the Central Bank. The work of the committee will not in any way interfere with the independent authority of the Central Bank to act as it sees fit within the statutory framework.
(7)that each credit union must appoint a risk management and compliance officer and that the credit union’s annual report should include a risk management and regulatory compliance statement. The Commission recommends the adoption of risk management and compliance systems for credit unions. The risk systems should address, among other things, lending, liquidity, investment and operational risks and should involve the preparation of a Risk Management Plan.
(8) that each credit union should develop an internal audit function.
(9) that Part III of the Central Bank Reform Act 2010 be commenced for credit unions. This will provide the Central Bank with the powers to set out the Regulations and Code of Fitness and Probity for the credit union sector.
(10 that the Central Bank set out a Minimum Competency Code for the credit union sector that would take account of the voluntary ethos of credit unions.
(11) that the powers and functions intended under the Central Bank (Supervision and Enforcement) Bill 2011 be applied to credit unions. The Commission notes that there is an urgency to the issues involved. However, the Commission could not, at this time,arrive at a single position as to the statutory mechanism for applying these powers and functions to credit unions.
(12) the introduction of a Prudential Rule Book, to set out in detail what is required of credit unions in each of the relevant areas as set out in 6.2.8. The rulebook will draw on the regulation-making powers of the Central Bank (Supervision and Enforcement) Bill 2011 with additional provisions where required.
(13) When setting out a new regulation, the Commission recommends that the Central Bank undertake a Regulatory Impact Analysis in line with existing requirements and best practice. The Regulatory Impact Analysis should be cognisant of the new regulation’s impact on the development of credit unions.
(14)that the regulation of Irish credit unions should be based on the complexity of their individual business models and the level of risk undertaken by individual credit unions.
(15) that the Central Bank’s administrative sanctions regime under Part III C of the Central Bank Act 1942 should be extended to credit unions.
The Minister for Finance will now examine the recommendations of the Commission with a view to early publication of legislation on credit union regulation. In the second phase of the Commission’s work it will turn its attention to setting out astrategy for the future evolution of the credit union sector. The Commission now wishes to:
:define the role of credit unions in the context of a restructured financial services sector, propose a model for modern credit unions,
define the structure and parameters within which financially viable credit unions will operate and examine options for restructuring the credit union sector, including proposals made by the Central Bank.
They must also examine and make recommendations regarding options for shared services between credit unions and the leveraging of appropriate IT infrastructure and management information systems, and
examine the issue of ‘social lending’ and consider now credit unions can play a role in providing financial services and products to meet the needs of low income groups.The credit union sector in Ireland plays a crucial role in helping to meet the financial, economic and social needs of many people. Recent adverse financial and economic conditions in Ireland and the absence of an appropriate statutory regulatory framework have contributed to the significant issues facing the sector. However, while the challenges faced by the credit union sector are significant, they are not insurmountable. A strengthened and re-vitalised sector can be in a position to play an increasing role in the retail financial landscape of the future. In Budget 2012 the government are planning to recapitalise Irish credit unions by €250 million.Further funding will be made available in 2012, if needed, once the credit union amendment legislation is in place up to an amount to be agreed to with our external partners. Legislation to strengthen standards in credit unions will be published by the end of June 2012. The figure is less than had been expected they were willing to recapitalise the credit unions by up to €1 billion.The Irish government is acting to underpin the solvency and viability of the credit union sector, while protecting the public purse.
The End
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