# 300/409 registered CU's have had their lending inhibited by their regulator.



## kaplan (13 Sep 2011)

Today's report in the Indo on the scale of regulatory intervention indicates a worsening credit union financial stability profile. It appears that 300 of the 409 registered credit unions have had their lending inhibited by their regulator. This figure correlates with sectors [broken link removed]

One always has to treat credit union representative comments with a grain of salt as they exaggerate to make the point - still if good borrowers are being turned away it means that that financial fragility is worsening as expected.

Could it be that the scale of rationalisation/consolidation will see the network of 409 being shrunk fit to 100 or so? Inhibiting lending is no doubt being used to ensure balance sheet risk is controlled for.


----------



## Padraigb (13 Sep 2011)

Care to tell us if you are connected with irishcuvoice.com? I tend to be suspicious of links to sites where the owners identity is concealed even from a whois lookup.


----------



## kaplan (15 Sep 2011)

A further development since the clipped wing story has seen Enda Kenny come out in support of the Central Bank's regulation and supervision of credit unions. If credit union trade associations think political lobbying, grass roots agitation, PR rhetoric and hyberole will somehow magic away serious sectoral instablity problems they got their message from Government's most senior member. Credit unionist PR spin on lending limit restrictions should be challenged - why have the limits been imposed would be a good start at getting to the heart of the matter.


----------



## Catch22 (16 Sep 2011)

More regulation is not necessarily good regulation. 

Sometimes, the Regulator is protecting himself as in 'if it goes wrong, look at all the restrictions, capital requirements we had in place and it still went wrong', when it could actually be the onerous levels of regulation that will drive a credit union under.

For example, putting a limit of €10,000 on any loan to a member takes absolutely no account of that member's ability to repay, credit history, personal circumstances etc. but is easy to monitor, so it suits the Regulator. The same member then todldes off to the bank and is never seen in the credit union again. 
These blanket restrictions are anti competitive and should be challenged in court.


----------



## county (19 Sep 2011)

If you prevent a business from trading to its potential them you destroy the ability to trade profitably.  Considering that the regulator wants less credit unions in the county isn't this an easy way to start the reduction by destroying their income generative capacity.  It might sound cynical but considering what has gone on behind closed doors in the regulators office/CB to date one has to be.


----------



## CU Manager (20 Sep 2011)

Padraigb said:


> Care to tell us if you are connected with irishcuvoice.com? I tend to be suspicious of links to sites where the owners identity is concealed even from a whois lookup.


 Rumour has it that the site in question is run by a person whose name rhymes with silly cobbs!


----------



## Guest105 (20 Sep 2011)

CU Manager said:


> Rumour has it that the site in question is run by a person whose name rhymes with silly cobbs!



Do you mean Eddie Hobbs


----------



## CU Manager (20 Sep 2011)

cashier said:


> Do you mean Eddie Hobbs


 
No. I'm sure we would be Billy-bucked if it was Eddie!


----------



## ajapale (21 Sep 2011)

Please address Kaplan's substantive points and refrain from personalised comments and idle off topic speculation.

Title edited to reflect discussion.

aj
moderator


----------



## kaplan (22 Sep 2011)

@CUManager - Thought I'd cut and paste the blog posting below. You wouldn't by any chance be one of the 70% who had their wings clipped?

"If 70% of credit unions have had their lending wings clipped by their regulator then system instability is worsening.

Continuing with their policy of abject denial, representative bodies are blaming system instability on regulatory intervention. Such rhetoric, rooted in volunteer victimisation, deflects from the underlying reason why lending is being inhibited.

Credit union problems are made up of avoidable internal causations.

Two external forces acted as system destabilisers.

The first took effect in 2007-2008 as asset values plummeted and credit union investments took a hammering. 

This was an inevitable consequence of highly imprudent investments in risk instruments no credit union should ever have undertaken. It must be remembered that ILCU promoted the strategy, defended it and frustrated regulatory attempts to roll back on risk taking. It is also the case that naïve financially unsophisticated directors and managers negligently exposed credit unions to imprudent investment risk.

The second external impact took effect as the economic recession took off and loan impairments escalated.

But well before 2008, credit union bad loans and poor lending practices had been exposed. Throughout the naughties as better risk borrowers shopped elsewhere for credit, credit union loan portfolios skewed towards higher risk borrowers. As early as 2006 problems emerged when the scale of bad debts was exposed in ILCU’s rationalisation report. While loan delinquency was far higher than would have been expected at the stage of the economic cycle, it was obvious the scale was underestimated and not being translated into bad debt provisions. Manipulating provisions to maintain dividend payout rates, credit unions were storing up a problem and entered 2008 without the provisioning or reserve cushion needed to withstand a wave of recessionary loan impairments. Their response was to engage in extend and pretend loan rescheduling as customer demand for new loans plummeted.

While credit unions would not have been immune to the impact of these twin external forces, these were amplified by internal factors:  


High cost, low value operating model
Total reliance on interest and investment income
Imprudent lending to business and developers
Exposure to first timer affordability risk
Inadequate reserving policy that took little if any account of risk
Dividend policy to maximise payouts at the expense of reserves and provisions

 These can be summarised as evidence of two underlying internal forces

*Poor governance
Bad management*

The regulatory response has been:

*Restrict investment risk* – inhibit risk taking and unwind imprudent risk positions
*Regulatory Reserve Requirement* - build capital buffers and prevent boards raiding reserves to fund dividend
*Rescheduling provisions* – permitting lending flexibility while ensuring appropriate risk provisions
*Lending Limits* – indicative of a worsening fragility profile and concern for credit risk practices and behaviours

The bottom line is this: If 70% of credit unions are having their lending wings clipped it means that they are considered too financially fragile to continue as viable independent entities. It matters little that they have excess funds to lend as pouring petrol on a fire does not put it out."


----------



## Bronte (22 Sep 2011)

This is all very confusing, we have been told that credit unions are refusing deposits, have customers wanting to borrow and able to afford same but lending is restricted.  None of this makes sense.


----------



## CU Manager (22 Sep 2011)

@Kaplan: No, our CU has no restrictions (yet!) so I guess we are one of the 109 or so in the clear for now. As I have answered your question then, quid pro quo, answer this please: do you have any association with the blog you keep referring to?


----------



## kaplan (22 Sep 2011)

@CUManager click on Kaplan


----------



## Slim (22 Sep 2011)

Bronte said:


> This is all very confusing, we have been told that credit unions are refusing deposits, have customers wanting to borrow and able to afford same but lending is restricted. None of this makes sense.


 
Many credit unions are limiting total savings, usually to quite a high threshhld, e.g. 50 or 60k. This is to avoid a situation where they are obliged to add to the reserves 10% of all savings. That reserve is built up out of hard pressed surpluses. CUs are set up for the ordinary punter, not high worth individuals. Also, CUs now have to be a lot more careful in lending so as not to lend to members who will only get into trouble. This, together with tighter regulation and falling demand for loans, means that CU loan books are falling and pressure is greater on investment income and on annual dividend.

Many credit unions have behaved in a dreadful manner over the early and good years. Their pigeons are coming home to roost bigtime and creating the current problems. Many credit unions who behaved prudently are also experiencing difficulty. The Regulator will be merciless in the next few years.


----------



## CU Manager (22 Sep 2011)

Slim said:


> Many credit unions have behaved in a dreadful manner over the early and good years. Their pigeons are coming home to roost bigtime and creating the current problems. Many credit unions who behaved prudently are also experiencing difficulty. The Regulator will be merciless in the next few years.


 
I dont necessarily agree with your opinion above. Very few CU's behaved in a dreadful manner.
Most CU's which are now identified as being in trouble, are victims of teh abject failure of the central bank/financial regulator to manage systemic risk in the wider financial services industry.
CU's lent to individuals as "going concerns" assuming that they would stay employed when all the while, those charged with ensuring a sound, stable and sustainable financial and economic ecosystem were asleep at the wheel.
Prof Kinsella hit the nail on the head - a "bail in" for struggling CU's is what is required. Its absolutely disingenuous to accuse most/many CU's of behaving dreadfully.


----------



## kaplan (22 Sep 2011)

@slim I agree, dominated by small cliques and managers, local boards squandered hundreds of millions in community capital – capital that’s badly needed today. “Well meaning amateurs” was the phrase used by the regulator to describe a systemic leadership and governance failure, unique to the Irish credit union movement.

@CUManager ; excusing governance failure by blaming an "ecosystem" might win you plaudits with your pals around the local board table but not here. Seems that regulator bashing is the order of the day for you guys in advance of having to explain yourselves at AGM's. Interesting combined PR spin approach adopted by ILCU & CUMA - probably has nothing to do with the working relationship between the individuals mentioned in the article though.

Kinsella was probably talking about bailing in the sector - not bailing out incompetent boards and managers.


----------



## CU Manager (22 Sep 2011)

@Kaplan. I dont know how the representative bodies work to be honest - perhaps you have some experience with one of them?

I didnt excuse poor governance at all, you seem incapable of accepting the fact that much of the delinquency now experienced in CU's has resulted from systemic failures of regulation as well as fiscal failings. I am no fan of Mount St but the real culprits can be found in Dame St and Kildare St!
And singing the praises of a regulator who imposes capital requirements of 10% of assets without risk weighting is barmy to say the least especially in the context of CU's being unable to raise capital for reserves except from retained earnings. 
Current CU regulation is heavy handed and deliberately fashioned to ensure CU's can't afford to grow their assets from intake of new cash while ensuring that existing cash cant be lent by imposing restrictions. 
The aim is to force a collective reduction in the movement wide Balance Sheet akin to balance sheet reductions ordered on the reckless bailed out banks.
Your sweeping generalisations regarding CU Boards and in particular, management, is most unwelcome and unjustified


----------



## ajapale (22 Sep 2011)

Thread topic reminder: 
CU's have had their lending inhibited by their regulator.

aj


----------



## kaplan (23 Sep 2011)

CUManager - you are right without knowing it. The problem is with reserves - credit unions didn't set enough aside nor did they provide properly for bad debts and when now asked to do so the business model ain't working. But lowering the capital ratio to allow growth won't work. I suspect that we will see mergers with post-merger stabilisation funding used to support those credit unions that can grow safely.


----------



## CU Manager (25 Sep 2011)

Kaplan - how insightful of you to propheticise what has been already leaked in numerous newspapers. Your assertion that I am right without knowing it is insulting and wrong - I would question your knowledge of the sector - no CU will be in a position to grow safely if they are required to put 10% of assets into reserve and fund such reserves from retained earnings, indeed no entity is sustainable with such constraints.
Lending is a risky business, most CU's have managed that risk quite well. The regulator is now over regulating the sector with lazy rules designed to make growth in the sector impossible and putting question marks on viability by setting unnecessarily high buffers. Any CU with adequate provisioning of impaired loans does not need a further 10% of total assets as a capital reserve - its unsustainable and unnecessary. It may indeed be counter intuitive as it will force CU's to take risks chasing higher returns to fund reserve requirements. Such risk taking could, of course, be discouraged by a risk weighted reserve requirement!


----------



## kaplan (25 Sep 2011)

@CUManager - WOCCU's benchmark capital ratio is 15% and if memory serves me right ILCU's target was 10% at one time. Of course a credit union can grow and maintain reserves at 10% but it will take consolidation and a modernised operational model to achieve this target. It's also highly likely that tax-payers money will be used to capitalise credit unions - which should unlock a latent capacity to act as proper savings and loans institutions.


----------



## kaplan (25 Sep 2011)

@ CUManager. What would you see as a reasonable reserve requirement and how would it work? You appear to be arguing for risk weighting in the belief it will result in lower levels of capital. How may CU Managers could be trusted to apply a risk weighting system and how many CU's would have the operational capacity to make it work without the need for intrusive regulatory intervention? It's probably the case that once consolidated larger better capitalised credit unions may be required to adopt a risk weighted approach.


----------



## CU Manager (25 Sep 2011)

Capital reserves are simply a buffer against insolvency. 

The reserve requirement would be risk based and the level would obviously vary from CU to CU depending on the risk profile of the CU's assets.
Issues such as loan rescheduling could rightly effect reserve requirements instead of the current absurd requirements of expense provisioning for such rescheduled loans.

I would also see general loan arrears affecting reserve requirements. Current expense provisioning would remain with underperforming loans having a direct impact on reserve requirements.


----------



## kaplan (26 Sep 2011)

@CUManager: It appears you are conflating loan loss provisions with capital reserves. The former recognises lending risks - the probability of losses and the latter the overall risk profile of the business including strategic, credit, investment and operational risk. I note you haven't addressed what you consider an adequate level of capital save to argue for "risk weighting" - which seems to be an argument to reduce levels of capital. Nor have you addressed the WOCCU recommended prudential standard of a minima of 15% to total asset (a leverage ratio). 

It's fair to say that the majority of credit unions would not have the professional competence or organisational resources to apply a weighting system at this time. It's also the case that weightings would reflect the overall undiversified scenario and on balance would result in the same level of capital as required today.   

It's well recognised that public confidence and trust are dependent on well capitalised credit institutions, which is why internationally it is now recognised that levels thought prudent in the past were too low. Hence the drive to increase capital requirements and introduce leverage ratios to compliment RWA's . It's also the case that credit unions elsewhere that are subject to more robust regulation and supervision regimes have significantly higher capital reserves than here.   

Similarly loan loss provisioning which is quite a separate concept to capitalisation requires credit unions to adequately provide for the probability of losses including those associated with modified loans over the life of these assets. 

To suggest as you are that 409 credit unions should be free to decide what level of capital and bad debts they should provide for within what would be a principles based regulatory system swims against the tide and is an unreasonable proposition given the relative maturity of their operating model,standards of professionalism and specialisation and instability circumstances credit unions have traded themselves into.


----------



## CU Manager (26 Sep 2011)

kaplan said:


> @CUManager: To suggest as you are that 409 credit unions should be free to decide what level of capital and bad debts they should provide for within what would be a principles based regulatory system swims against the tide and is an unreasonable proposition given the relative maturity of their operating model,standards of professionalism and specialisation and instability circumstances credit unions have traded themselves into.


 
I did not suggest CU's would be free to decide at all. I simply said that capital requirements should be measured against risk. I gave a rough idea of what I was talking about on a practical level of measuring risk on the riskiest asset on the balance sheet - the loan book.
Anyone can advocate for higher capital positions - its the easy and lazy position to take. 
The reality is that such capital must be raised through earnings. Increasing capital reserve requirements is certain to lead to increased loan interest rates - which is obviously not in the members best interests.

It is completely *unfair*  to say "...that that the majority of credit unions would not have the professional competence or organisational resources to apply a weighting system at this time."
What do you base this on? Where are you getting your knowledge of individual CU's - or is this more generalisations and unfounded sweeping statements designed to further your anti credit union stance?

There are approx 400 CU's in the ROI. I am an industry insider and even I do not have the personal knowledge of the Boards and Managers that Kaplan seems to think he has!


----------



## kaplan (26 Sep 2011)

@CUManager: We may have a better discussion if you would desist from ad hominem attacks and uninformed, incorrect attribution of motive.  Why not address the substantive issue you raised in criticising current capital adequacy requirements.


----------



## kaplan (26 Sep 2011)

There are those of us who can distinguish between the credit union as a systemically important part of the future of the banking sector and the way in which credit unions are governed and managed. This quote from the most recent regulatory speech on credit unions captures the essence of the issue:

"It might be convenient to put the stresses now evident in many credit unions down to the difficult macro-economic environment we are now experiencing and there is much truth in that. However, this is only partly the reason. *For those increasing number of credit unions who now find themselves in financial difficulty there is a recurring trend – they have been poorly governed by boards and management and effective oversight by the supervisory committees has been non-existent.*

Many of the poor governance practices have come about in part due to the current loose legislative framework in place for the prudential oversight of the sector, but also because of the general poor compliance culture built up in many credit unions over the years.

It is pleasing, however, to see attitudes to compliance changing. Those directors and managers who have consciously upgraded policies, processes and controls in recognition of the ‘job to be done’ are to be commended. In order to build on this we now see the immediate introduction of statutory requirements in relation to governance and competency as being vitally important in putting a clear framework in place in relation to responsibility and accountability.

An appropriate fitness and probity regime for the credit union sector will help to strengthen governance and ultimately enable prudent development into other areas of business. We have asked the Department of Finance to commence the fitness and probity provisions contained in the Central Bank Reform Act 2010 for credit unions and will be bringing forward proposals to credit unions in this regard shortly."


----------



## CU Manager (26 Sep 2011)

so you are relying on a speech from the Registrar to make such generalisations rather than your own knowledge?
The regulator was referring to the samll minority of CU's who got into financial difficulty but you see fit to tar 400 odd CU's with the same brush!


----------

