Warning that some Credit Unions won't be paying dividends

@Anyone1
Speculation on who posters are or are not is not something I engage in. Not that it matters much but I first became a credit union member over 30 years ago. You imply I know of the subject matter I’m writing of. Others are free to decide if I do and demonstrate through their own writing that they are knowledgeable. For now let's deal with the discussion issue at hand – why credit unions can’t pay a dividend.
You might find this link interesting [broken link removed]
 
@anyone1
Deal with the issue. Credit unions are regulated credit insititutions authorised to take money from the public and lend on their own balance sheet - which is the standard definition of banking. They do not operate with the sole purpose of making profit but without profit they cannot operate. My view is based on research, analysis, professional expertise, academic emperical evidence and considered debate with other informed individuals. It is up to others to judge the merits or otherwise.

It is frequently the case that anyone who cannot refute another’s view and cogent argument, alleges motives of the other and then attacks them based on their allegation. Why? It is either the person hasn’t the competence, knowledge, expertise to offer a cogent counter view or they realise they cannot as the facts speak for themselves. It is also frequently the case that people representing sectional interests log on to this site to anonymously promote their organisations agenda which is seen in rhetoric and hyperbole. Most thinking people intuitively recognise spin and bluster for what it is. They ask their own searching questions in pursuit of the facts and then make their own judgement based on those facts. For those reading this thread I suggest you ask your own questions of your credit union and listen for the facts through the inevitable bluff and bluster – can they pay a dividend this year and if not why not? Listen for the facts and ignore the spin.

What’s more they should as shareholding members attend the credit union AGM this year and hear for themselves of its financial performance. Before they do they should consider the annual accounts, not that they are transparent, and set out their questions of the board of directors and management. Who knows maybe people reading this thread may resolve to exercise their right to ask questions and get answers from their credit union board. That is if they are concerned that their credit union, which they collectively own and govern, is financially stable and can continue to do what it is supposed to do which is to be a safe place for peoples savings, make prudent loans and educate people in the wise use of money

They may discover their credit union is a safe place to save, has lent prudently and invested money wisely. Or that it isn’t a save place to save, has lent imprudently and unwisely lost money in investments that should never have been made.


You are right on one thing people should go to their credit union and ask one question - will it be able to pay a dividend this year and if not why not?
 
So if credit unions had decided to change their model, they could have paid a guaranteed rate to their members on savings even if they made a loss that year. But because they don't use that model, they can't pay a dividend, even from previous years surplus.
In other words, the likes of Anglo can pay bumped up rates to their customers even though they're making a loss, while some credit unions can't pay anything even though they may have put funds aside from previous years. Still sounds all wrong to me.

My understanding is that the very same Regulator who is now preventing credit unions from paying a dividend is the same Regulator who restricted the amount of deposits that a credit union could accept and therefore restricted credit unions from changing their model. and reading the Credit union act, i see that even where credit unions take deposits, these must be held as security against any loan, thereby restricting the credit union even more and hardly encouraging them to move away from their current model.

I see plenty of credit union service development actually. What I don't see is any sign of the Regulator allowing credit unions to operate on an even playing field.

As said previously, credit unions weren't the only ones caught out by the collapse of the banking system and it is blatantly incorrect to call them incompetent. For many years, credit unions paid a higher rate on savings than the banks and charged a lower rate on small and medium sized loans, which I would imagine is their core market.

What happened in the last number of years was that the banks became very aggressive and threw money at people, so the credit union could not compete with that when it tried to counsel members on prudent borrowing.

To portray the credit union model as bust seems to me to be skewing the picture somewhat to say the least. It's the banking model that's bust. And big time!
 
@ catch22
You misunderstand the regulators function – it must ensure compliance with the law. It cannot change the law. It cannot agree to non-compliance. The restrictions you write of are legal restrictions not regulatory ones. Only the Minister for Finance under order or SI or the Oireachtas can change the law governing credit unions.

Thus the law and not the regulator is preventing credit unions using their reserves to pay dividends. The law is quite clear, dividends can only be paid from this year’s surplus or previous years surpluses set aside to pay for future dividends – usually called a dividend reserve account.

The regulator concerned that credit unions will try to use their reserves to pay dividends is rightly and prudentially taking action. It is doing its job. I do think however its 10% regulatory reserve requirement may need to be flexed – but only as far as 8% - anything lower is too risky- remember credit unions can only replenish reserves from operating income which is predominantly loan interest.

I didn’t call credit unions incompetent, I wrote of skilled incompetence (Credit unionists and their human systems have become skilled at incompetence.) see here:
http://harvardbusinessonline.hbsp.harvard.edu/b02/en/common/item_detail.jhtml?id=86501

It is hardly competent to invest in instruments you do not understand and lose money which many did. Ask the Financial Ombudsman who expressed concern in one case study “The Ombudsman has also drawn this matter to the attention of the Registrar of Credit Unions in the Financial Regulator’s office as he is concerned that if this is how Credit Unions in general and brokers advising them are operating it exposes the funds of members of Credit Unions to a degree of unacceptable risk which cannot be countenanced in any financial services organisation entrusted with members’ money.” [broken link removed]

Legislation and Ministerial orders and not the Regulator establish the limits on total deposits per saver which is a prudent balance sheet safety constraint.

The law allows for shares to be taken as security up to 25% of the outstanding loan amount which can be reduced in individual cases by credit union boards.

There was nothing preventing credit unions moving to attracting deposits rather than shares save the mix between shares and deposits within total savers limits - which would have been addressed had they asked but they didn’t. In any event, average deposits are said to be far lower than the limits permitted.

The last time credit unions charged a lower rate for loans was when bank rates were above 12% - an only because this is the maximum rate a credit union is legally allowed to charge. You are right they did pay a higher rate for deposits until 2008 and many still will – but from 2000 to 2008 they paid too high a rate, massaging bad debts to do so and didn’t build their reserves. It what’s called the dividend maximisation strategy – chasing high dividend rates they took on too much investment risk, hid their bad debts and many charged higher loan rates driving good customers away. Banks are bust because of the property bubble – credit unions are bust because of both an investment and property bubble and bad loans made but not written off during the boom years – Irish banks did not lose their shirts on risky investments.

It’s hardly prudent to continue topping up loans when capital is not repaid. It’s hardly prudent to massage bad debts to keep loan write downs low. Yet many did. Credit unions were agitated because people were refinancing their loans using mortgage finance that credit unions actively lobbied to be allowed to do. Just as well – imagine the loan write downs had credit unions been permitted to engage in home mortgage lending. Still it didn’t stop some from financing small scale local speculative building developers who have gone belly up owing millions. It is hardly prudent not to take security for a secured loan properly – in all cases of regulatory audits of loan security it was found to be flawed or unreliable according to the regulator. Its hardly prudent to finance home buyers down payments in the middle of a property boom – two thirds of people who borrowed unsecured to finance their down payments said they used credit union finance.

If this is a measure of competence or otherwise let others decide.
 
Let's say I have a loan of €500 with my credit union and savings also of €500. If I wish to withdraw a measly €3.00 to pay for my toll charge, it will have to be approved by the board of directors at their next meeting. And if their last meeting happened to be yesterday, then I will have to wait for a month to get my €3.00. And that's the law.

Therefore, credit unions are forced to operate with both hands tied behind their backs. And the Registrar of Credit Unions has resisted attempts to modernise the Credit Union Act.

It's a good idea to have sufficient reserves, but for the Registrar to come along more than half way through the credit union's financial year and impose unrealistic limits in the same year just shows how out of touch the Registrar is.

A major concern regarding the Registrar is his habit of conducting his business through the media. It is thoroughly unprofessional in comparison to his counterpart in the North or in Britain, where they work quietly, but effectively, behind the scenes. The Registrar has significant powers under the Credit Union Act and should use them where required with individual credit unions rather than through general public utterances aimed at the entire credit union movement.

Credit union loan rates are and were more than competitive in comparison with the major banks. The maximum rate may be 12%, but the average rate is more like 9%, which is competitive in comparison to the banks on small and medium sized loans.

If credit unions made bad investment decisions, there were an awful lot more that made the same mistake, from the high and mighty like Dermot Desmond and Sean Quinn to the humble Anglo Irish pensioner.
The banks have had to be bailed out with billions and billions of taxpayers money. I'm not so sure about them not losing their shirts on risky investments, we could start another thread on that one.....but I am sure that we've all lost our shirts due to the greed, negligence, malpractice and downright dodginess of our banking brethren. And, if memory serves me right, we've had to pump millions of taxpayers money into AIB before, when they actually did lose their shirt on a risky investment back in the eighties called the Insurance Corporation of Ireland.

If this is the level of the banks competence, God help us all.
 
@catch22
Nice unreconstructed credit unionist rhetoric and again I note you fail to deal with the issues. You quote the law concerning the credit union attached savings rule which is similar to a banker’s lien. It means a savings balance cannot be reduced below 25% of the outstanding loan amount. This law, written in 1998, predates the current Regulatory Authority by six years. The Regulator can only regulate according to the law and cannot change the law. The only body that can change the law is the Oireachtas once the Department of Finance draft and Minister publishes legislation. If it is nonsense then it’s the fault of those who drafted legislation including credit unions themselves represented solely by the ILCU at the time. Dail debates from the time are silent on the aspect of law you try to pin blame on the Regulator for.

Changing laws is the remit of Government and not regulators. Nonetheless the Regulator is on public record stating the law is out of date and needs to be reformed. In fact had the Minister for Finance agreed to regulators request to change the law governing investments in 2004 credit unions would not have lost €500m in investments. I note you chose to ignore this example as it appears not to suit your argument. The fact is the Regulators efforts have been frustrated by ILCU lobbying the department of finance.

Unfortunately for some dyed in the wool credit unionist activists the new Regulator did not play by the old rules – which amounted to a far too cosy relationship with previous regulator being far too captive of the ILCU and its agenda.

The Regulator is on record stating compliance has not yet been achieved with the credit union act which is indicative of a legacy of non-compliance it inherited. Credit unions have been practicing a la carte compliance with the law for years and have excused this saying the law is out of date.

Nor are diehards happy that laws are finally being supervised and compliance insisted on…in short the regulator has been doing too good a job. To suggest a regulator should work behind the scenes and not comment in public in other words be non-transparent is sheer nonsense. No regulator would ever allow itself to be muzzled simply because the regulated entities and more particularly their trade body doesn’t like what it says or does.

Credit unions lost money in investments they should never have made. No credit union board should ever have decided to invest in equities, unit linked funds, USITS, tracker bonds or any other long dated risk investment. They simply did not understand their fiduciary duty of care to the credit union and acted instead with only one stakeholder in mind and that was the saver. In short many were grossly negligent in their collective actions. Your comparisons to the worst behaviours of Irish bankers are entirely appropriate as many credit union directors and managers were just as negligent in their governance and management of the business. They should also be forced to resign.

Finally you should also check your facts on ICI as you are incorrect in what you say on the matter as well.
 
Catch22 said:
Let's say I have a loan of €500 with my credit union and savings also of €500. If I wish to withdraw a measly €3.00 to pay for my toll charge, it will have to be approved by the board of directors at their next meeting. And if their last meeting happened to be yesterday, then I will have to wait for a month to get my €3.00. And that's the law.
Click to expand...

In practice CUs will allow you to attach only a fraction of the €500, parking the rest in what is sometimes called a 'slash one' account, which can continue to operate as a main account.

The legislation is certainly in need of updating but the concept of security by attaching savings is useful and may have helped CUs from complate disaster in the boom years.

I think that the regulator conducts much of his business through the media for two main reasons, namely:
1. The bull headed opposition of the ILCU to close regulation over the years, and
2. The likelihood that a number of large CUs have been/are being grossly mismanaged with the potential for movement shaking fallout if/when the crap hits the fan/newspapers.

I think it is unfair to be too critical of CU directors who invested in, say, perpetual bonds having received a capital guarantee from Davy/ILCU. CU boards are, in general, made up of well meaning amateurs and that is the ethos of the movement.

I think Catch22 is correct in principle about ICI and would be interested in where his 'facts' are incorrect.
 
@Slim
The issue of perpetual bonds is a good example of where the amateurs got it badly wrong. Their blind faith in ILCU/DAVY is no excuse nor is their reliance on other “investment advisors”. Some of whom sat on credit union boards.

Under law credit union directors are responsible and accountable for investment decisions. This implies they have the competence to make them. Implicit also is the concept of fiduciary care which requires directors to act in the best interests of the company they govern.

Consider the business they govern – borrowing short and lending long carries risks the credit union law sought to limit on the balance sheet risks of credit unions. This is why loan amounts and terms are restricted along with savings. The law assumes credit unions will do what they are supposed to do and that is to lend the majority of their funds which is supposed to be over 70%. The balance is supposed to be held in short term highly liquid investments.

But once Irish credit unions (unique in the world) slowed lending and piled into investment they conveniently ignored balance sheet risks constructing portfolios of long dated products and instruments. They seriously destabilised their business model even where some on the investments carried capital guarantees. This is not the fault of investment advisors but the fault of boards themselves who either did not understand the business or chose to ignore how it should have been managed.

Of course many blindly followed their trade association’s strategy and advice. Of all the parties involved the most accountable for the credit union investment bubble was the Irish League of Credit Unions. This body promoted the high risk investment strategy, did nothing to address balance sheet risk and fought against the Regulators attempts to reign in risk taking. It continues to object to the Regulators role and efforts – instance its rejection of a regulatory reserve ratio. It even has the audacity to suggest the Regulator should not involve itself in accounting standards.

The public will not be told of the hidden war between ILCU and the State which is ongoing since it did not get its way when the 1997 act was being enacted. It wanted statutory legal recognition for its role as self-regulator with the powers to establish mandatory prudential standards and ensure compliance.

For a body that alleges it monitors and supervises its members through its savings protection system it did nothing to control balance sheet risks. It remains what it always has been an exclusive club for amateur directors pretending to be an association of credit unions. Its actions and behaviours are one of the primary causes of the credit union crisis along with amateur director’s bad governance.
 
Having a different viewpoint or disagreeing with an opinion is not the same as avoiding the issues.

If you only want to hear one viewpoint, I would suggest you log on to www.it'sallaboutmycuvoice.ie. Or read the new book by The Hobbs Twins titled, "Yes, We Do Know It All, Sure We're From Cork, boy".

More seriously, the Registrar of Credit Unions was quoted in the media as saying "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".
This is totally irresponsible, headline chasing, discourteous language from a senior civil servant, whose duty is to regulate credit unions, with a view to maintaining their financial stability and well being.
Regardless of his opinions, such an important State office holder should not engage in public slagging.

The Financial Regulator would never dream or, more importantly, would not dare to speak in such a glib manner about the banks, despite their reckless, greedy, self serving behaviour.

The Registrar has significant powers under the Credit Union Act and should use them judiciously to regulate, rather than engaging in tabloid type commentary, which can only cause damage to the well being of credit unions, the very opposite of what the Registrar is mandated to support.
 
@catch22
Once again you fail to deal with the core issue. The regulator is not responsible for the €500m+ investment losses incurred across the credit union sector. The banks aren’t either. Credit unions lost €500M+ all on their own chasing a mirage – which is a good metaphor to illustrate a point. Here’s what the Regulator had to say late last year:

"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……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 enormous accumulation of surplus funds would not have occured had credit unions did what it "Says on the Tin - which is to lend money.

They should have lent more and invested far less. Why this happened is complex but in the main all of the elements required to lend more, were within the control of credit unions themselves.

It is why this year nigh on 200 will be unable to pay a dividend to savers unless permitted to use their capital reserves - which is something that can only undermine financial stability further. It is also at the heart of illiquidity or cash shortages - which is why credit unions are looking for a NAMA type bailout of the loss making investments.

Your link isn't working but this one is : http://www.irishcuvoice.com/

Kaplan

ps: @catch22 your reference to Twins is intriguing - what are you driving at?
 
Once again, having a different viewpoint or disagreeing with an opinion is not the same as avoiding the issues.

See Catch22 posts on 24/6/09, 18/6/09, 14/6/09.

We all have 20/20 vision in hindsight.
 
@anyone
you wrote:
Credit Unions are not looking for a bailout, so no idea where you are pulling that idea from, its a down right lie anyway
Click to expand...
.

The ILCU has said it's looking for a government guaranteed central liquidity function which is a bailout by common definition these times.

115 credit unions were reported to be operating at a loss for the first quarter and this figure had risen to over 200 by the second quarter. They will be unable to pay a dividend from surpluses as required by law and unless they have specifically set aside profits to pay future dividends, which very few have, they cannot legally use their reserves. This is unrelated to the proposed regulatory reserve ratio which would if introduced have caused the figures to jump to slightly over 300.

Lending restrictions advocated by the ILCU in 1997 were improved on in 2006 but few credit unions applied for the increased limits.

Credit unions had an option to restrict savings growth – some did as they were prudently and wisely governed. Most didn’t.

Who knows they might once again become the leading provider of affordable financial services to ordinary people. This is of course what their purpose is.

You really should read more here: [broken link removed]

[broken link removed]
Kaplan
 
Kaplan

"The ILCU has said it's looking for a government guaranteed central liquidity function which is a bailout by common definition these times." Are you confusing the need for a government backed Savings Protection Scheme or Central Bank backed liquidity provisions with 'bailout'? They are hardly the same!!

"115 credit unions were reported to be operating at a loss for the first quarter and this figure had risen to over 200 by the second quarter. They will be unable to pay a dividend from surpluses as required by law and unless they have specifically set aside profits to pay future dividends, which very few have, they cannot legally use their reserves. This is unrelated to the proposed regulatory reserve ratio which would if introduced have caused the figures to jump to slightly over 300." It remains to be seen how many cannot pay dividend at year end taking all year end adjustments into consideration. Bonds have been sold and prices of remaining bonds have strengthened so many will have a slight improvement as year end approaches.

"Lending restrictions advocated by the ILCU in 1997 were improved on in 2006 but few credit unions applied for the increased limits." Can you elaborate on this please as I was under the impression the lending restrictions had not changed since 1997?

"Credit unions had an option to restrict savings growth – some did as they were prudently and wisely governed. Most didn’t." Yes, many more could have restricted savings growth but it is very difficult in a community credit union to turn members away with legitimate windfalls/savings and towards the predatory banks that we compete against.

"Who knows they might once again become the leading provider of affordable financial services to ordinary people. This is of course what their purpose is." Yes, true and as the banks withdraw from lending to ordinary people we are now in prime position to provide credit, however we must be careful not to rush in where banks fear to tread.

You say time and again that CU boards are made up of amateurs but isn't that the strength of the movement? No profit motive, no 'shareholders' in the normal sense, little greed and a genuine care for the members! There are many faults at national level with ILCU and CUDA and their internecine feuding but ,overall, I know they mean well.

Would it not be possible for you to make positive suggestions from your perspective rather than spreading alarmist warnings that can only undermine the movement and may help to bring to pass the very things you warn about?
 
While the people managing credit unions may be amateurs in my opinion they have done a better job than our high fliers in the banking sector who recklessy lent millions to developers causing all the turmoil and pain we are all now suffering.
 
@Slim

The guarantee being proposed is for a central liquidity system unrelated to ECB/CBI supports and stabilisation.

Lending limits (S35) were flexed in 2007: see FR website and ask yourself the question why so few credit unions appied for higher limits? http://www.financialregulator.ie/industry-sectors/credit-unions/Pages/apply.aspx

Understanding organisational systems – called human systems tells you that skilled incompetence is rarely changed from within. The internal actors cannot rewrite the script and keep doing business they way they have always done.

The few who try to change the way things are done are blocked off by the dominant group. In the case of credit unions this dominant group, its thinking and behaviours are manifest within the ILCU and CUDA systems and within credit unions themselves. It is why change has not happened and cannot without external intervention more often than not as a result of a crisis.

One of the pre-conditions needed to effect change is telling people the brutal facts – the hard truth their existing way of doing things no longer works.

The issue is this. Credit unions must change the way they run the business if they are to survive. They cannot do this themselves. They need help. The only sponsor with the power, resources and influence to do this is the Minister for Finance.

Credit unions are systemically important to the nation and individually important to local communities. If enough people are concerned then maybe they will act. Democratic governance is a powerful force when focussed on doing the right thing which is to insist credit unions do what they are supposed to do and call on government to deliver on its role which is to ensure credit unions reform is implemented and they become once again a dominant provider of affordable financial services to ordinary people. People can start by attending AGM’s this year and asking the hard questions of boards.
 
The liquidity fund idea was to give those credit unions requiring it, access to liquid funds. Most, if not all of it, would have been funded by other credit unions depositing into it. Definitely not a NAMA type bailout.

Those credit unions who decided not to avail of the increased lending limits should not be criticised, as the vast majority of credit union type loans should be paid back within 5 years and the increased limits were only suitable for some credit unions. Prudent lending limits.

Reform of the credit union movement is needed, but some of the reforms do not need new legislation and should be implemented now.

Despite assertions that credit unions have the ear of the Minister or are able to exert major influence, one suspects that the banking lobby still rule the roost in this regard, despite their own "skilled incompetence" and reckless behaviour.

It can take a long time to get new legislation passed. It would be a good sign to see the Minister acknowledge the systemic importance of the credit union movement by making orders on those sections of the CU Act that can be changed by a stroke of his pen. Reforms that all sections of the movement have been calling for.
 
The guarantee is necessary as an interim measure as is a solution for impaired investments. Once immediate liquidity is resolved the sector will need an effective reliable central liquidity entity -for example a central credit union or similar body where credit unions are mandatorily required to deposit most of their excess liquidity/funds.

The sector will also need an effective stablisation system designed to ring fence and fund the recovery of viable credit unions either as is or funding a merger workout arrangement with a stronger operation.

Limits were extended following protracted lobbying by the ILCU claiming credit unions were severely restricted in their lending - yet few applied for the new limits proving that restrictions were not at the root of lending stagnation.

The real problem is legislation was framed for a model that no longer works. Reforming bits won't solve for the fundamental problem of an out of date business model and badly designed financial safety net. Rules based regulation is required for credit unions but this dosen't mean they should be embedded in legislation - instead regulators are free to set rules which allows for a far more flexible response to credit union requirements.
 
What happens when some Credit Unions announce that no dividend will be paid this year?
Even those C.U.'s that intend to pay a dividend, normal percentage or not, will surely experience a run on deposits, as rumours begin and panic sets in.

Should the wise remove their savings now, rather than face that scenario?
 
hellbent said:
What happens when some Credit Unions announce that no dividend will be paid this year?
Even those C.U.'s that intend to pay a dividend, normal percentage or not, will surely experience a run on deposits, as rumours begin and panic sets in.

Should the wise remove their savings now, rather than face that scenario?
Click to expand...

Worst case scenario, the Deposit Guarantee Scheme will gurantee €100,000 per account. This would only be necessary where the CU was badly under water and had to be wound up. More likely that the credit union will seek liquidity help from ILCU Savings Protection Scheme if there is a run. This is entirely discretionary on part of ILCU. Best to do everyone a favour and reduce your account below 100k. Slim
 
You'd swear it was the end of the world, which just goes to show how good the dividends from credit unions have been in the past.

Listen, the banks are paying 0.01% MINUS DIRT on deposit accounts, so unless you've got hundreds of thousands in the credit union, you're not going to lose your shirt, ok.

Anf if you do have hundreds of thousands in the credit union, you probaly could have got better deals somewhere else already.

Anyway, I believe most credit unions will pay a dividend, and a better rate than most of the banks at that, so let there be no panic.
 
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