# The anatomy of a Credit Union



## Brendan Burgess (10 Jan 2019)

I am a member of the Capital Credit Union and have just got their Annual Report. I thought it would be instructive to look at their figures. 

*Summary of the profit and loss account 




*

So, in effect, it has free money and it earns its income from lending and investing this free money.

It costs €5.3m in overheads to operate this savings club.


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## Brendan Burgess (10 Jan 2019)

*Summary balance sheet as published 




*
A certain amount of these loans to members are backed by savings. In some cases people have €20k in shares on which they earn 0.125% interest and then take out a €10k loan at 6.6% because "they don't want to touch their savings".

In other cases, people have €5k and want to buy a car for €20k, so they borrow the full €20k.

I am guessing that around €20m of these loans could be repaid immediately simply by setting the shares against the loans. This would give the following balance sheet.





There is no demand for loans and so they don't need that €161m in shares. The members would be better off investing directly themselves in the banks or bonds or whatever. So the Credit Union should repay the unwanted money. 

The revised balance sheet would now be:


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## Brendan Burgess (10 Jan 2019)

This last balance sheet is the true measure of the Capital Credit Union. 

It has €44m in loans to members which is funded by €17m in shares and the balance by retained profits. 

Or put it another way, 70% of the debtors could go bad and the Capital Credit Union would still be solvent. 

But because it has €161m of shares, the Central Bank regards it as a big credit union and pays it a lot of attention. 

It paid out a shocking €304k in regulatory levies to the Central Bank during the year. 

A credit union with such high accumulated profits compared to the amount of loans and amount of shareholders funds should have minimum supervision from the Central Bank. The risk in this Credit Union, if it repaid the unnecessary shares, would be close to zero. 

Brendan


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## NoRegretsCoyote (10 Jan 2019)

Brendan Burgess said:


> But because it has €161m of shares, the Central Bank regards it as a big credit union and pays it a lot of attention.
> 
> It paid out a shocking €304k in regulatory levies to the Central Bank during the year.
> 
> ...



It's a fair point @Brendan Burgess , but there is implicit taxpayer support for credit unions. It is fine in theory to say that members' deposits in a credit union resolution would be written down, but it would be politically impossible. Even when credit unions go bad the taxpayer makes good all the depositors - take for example Newbridge Credit Union in 2013 where despite €40m of losses I understand no member saw their deposits written down.


I think it is only fair that institutions should be regulated heavily if they are subject to so much implicit taxpayer support.


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## Brendan Burgess (10 Jan 2019)

Hi Coyote 

I am not sure which of my points you are referring to? 

I am not saying that the members' shares in Capital need to be written down - quite the opposite in fact. 

I am saying that the excess cash should be used to pay back the deposits. 

Then Capital will have €44m of loans with €31m of reserves. In other words, it will be rock solid and would need no regulation other than filing the annual report once a year.

Brendan


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## noproblem (10 Jan 2019)

*Summary of the profit and loss account 




*
*
The figure of €144 ml in investments yielded a profit of €1.5 ml which is a nice figure but a very small %age return on a very large amount of capital. Just wondering if the Credit Unions are in some way or other controlled by the state in what they can invest in?*


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## RedOnion (10 Jan 2019)

noproblem said:


> if the Credit Unions are in some way or other controlled by the state in what they can invest in?


Yes, they are controlled by legislation.


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## Brendan Burgess (10 Jan 2019)

The percentage return is actually quite high and must be due to some older fixed rate products. 

The Credit Unions generally speculated in Icelandic Bonds and other such products and lost a lot of money on them.  

Now most of their money is in other bank accounts and, I presume, short dated gilts.

Brendan


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## jpd (11 Jan 2019)

IMHO a complete waste of resources - it would be better to lend it directly to the State and/or banks and stop paying the Credit Union management and staff for taking in money and handing it to the State and/or banks

Not a popular view I am assuming but really what is the point of this business practice?


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## Leper (11 Jan 2019)

To be honest some of the conversation here is above my head and I don't understand some of it. However, I should point out that back in the day I was involved in the formation of a Credit Union. No staff were paid. Loan applications were heard by a committee and where possible loans were given to members. Most loans were repaid, but some were not. I should point out this Credit Union was pretty small in the scale of things now.

But, back in the 1970's loans from banks, building societies, insurance companies etc were difficult to source. Whenever Joe Soap sourced a loan, he was placed on a waiting list for months. Many people today haven't heard of Bridging Loans which were given by banks to applicants while waiting for a mortgage to be issued. In my case the Bridging Loan lasted 12 months before payments on our mortgage began.

There were other issues too. Illegal Money Lenders fleeced the people, but think about it, the people had nowhere else to go such was the banking loan processes then. The Illegal Money Lenders charged huge interest rates, kept Childrens' Allowance books as collateral and used violence on occasions. The credit union movement had a large say in the defeat of such illegal moneylending practices.

While working in the UK I noticed the Credit Union movement was strong within the black and Irish community. The Brits (for some reason unknown to me) mainly ignored credit unions. 

Perhaps I'm looking at credit unions through rose tinted glasses. But, when I think about it, where would many Irish people be without credit union membership? I'm not involved now in the running of a credit union, but I think they are achieving what they were set up to do.


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## Kimmagegirl (11 Jan 2019)

I keep about €12k in my Credit Union.  I have never borrowed from the and probably never will. I have never understood why people keep their savings for a "rainy day". I wouldn't borrow at 6% and accept 1% on my deposit.
I like my Credit Union. I always get a smile. I can get "cash" from my account. My current account is with the Ulster Bank and I pay them to get a scowl.


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## 24601 (11 Jan 2019)

Brendan Burgess said:


> *Summary balance sheet as published
> 
> View attachment 3351
> *
> ...



This may be logically true but in the real world this isn't how things work. The vast majority of credit union members do not have the desire, interest or capability to invest directly in bank deposits or bonds and simply want to put their money somewhere that is reasonably accessible, safe and separate from the current account - Irish people love compartmentalising their money. Many credit unions are trying to do what you are saying and the push back from members is considerable. People seem quite content to leave money sitting in their CU account forever with minimal return. 



Brendan Burgess said:


> This last balance sheet is the true measure of the Capital Credit Union.
> 
> It has €44m in loans to members which is funded by €17m in shares and the balance by retained profits.
> 
> ...



This is a key point that seems to be lost on the Central Bank. Their approach to regulating the sector is just bananas. 



NoRegretsCoyote said:


> It's a fair point @Brendan Burgess , but there is implicit taxpayer support for credit unions. It is fine in theory to say that members' deposits in a credit union resolution would be written down, but it would be politically impossible. Even when credit unions go bad the taxpayer makes good all the depositors - take for example Newbridge Credit Union in 2013 where despite €40m of losses I understand no member saw their deposits written down.
> 
> I think it is only fair that institutions should be regulated heavily if they are subject to so much implicit taxpayer support.



There is not "implicit" support. Credit Unions are covered by the DGS, which is explicit. It's worth nothing that credit unions have a bail-in mechanism administered by the ILCU which has worked quite well, at least from the point of view of limiting the need for taxpayer support. Compared to the banks 3 or 4 credit unions out of 400 or so failed and these represented a tiny percentage of the asset-base. The DGS was called upon in a few cases but by and large credit unions sorted out their own problems without the need for a bail out. All the "pillar" banks here would have failed without huge capital injections. You clearly don't understand how the DGS works either. Credit unions are in fact levied for it along with many other statutory levies so taxpayer support is fairly qualified. I'd argue they have less "implicit" support than the banks since the CB has seen fit to liquidate some of them.


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## Brendan Burgess (11 Jan 2019)

24601 said:


> Compared to the banks 3 or 4 credit unions out of 400 or so failed and these represented a tiny percentage of the asset-base.



The credit unions were extensively bailed out by the tax payer as were all other depositors in the main banks.

If the government  had done the right thing, and not guaranteed the bank deposits, many , perhaps most, of the credit unions would have gone bust. 

And that is why they should not be acting as a savings intermediary. 

Brendan


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## RedOnion (11 Jan 2019)

Brendan Burgess said:


> If the government had done the right thing, and not guaranteed the bank deposits, many , perhaps most, of the credit unions would have gone bust.


There were a small number of CUs put under extreme pressure by the liquidation of IBRC as they had invested in a bond which wasn't covered by DGS, and they were instead unsecured creditors in the liquidation.


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## WizardDr (11 Jan 2019)

Brendan Burgess said:


> The credit unions were extensively bailed out by the tax payer as were all other depositors in the main banks.
> 
> If the government  had done the right thing, and not guaranteed the bank deposits, many , perhaps most, of the credit unions would have gone bust.
> 
> ...



1. The Credit Unions should have had access to NTMA to place its excess funds. They were not facilitated with this and were forced by Central Bank to take less 'risky' investments er..Banks. That is what the Department of Finance should do but the NTMA don't want t deal with the Peasants. It would be lower borrowings costs for the State. That is why they should be a savings intermediary - until some of the unsound restrictions are banished. For they were based on fiction not fact. 

I think the decision to guarantee depositors might have been taken as the deposits were something like €100bn - and the CU whilst significant were not the reason for the decision. Frankly that is indirect and irrelevant.

What I would like you to focus on was the alleged €500m that was going to have to made to bail out Credit Unions ended up being €35m. So the predicted credit losses of Credit Unions did not materialise. That is more relevant.

You need to be a little bit more respectful to the Peasants.


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## Brendan Burgess (11 Jan 2019)

WizardDr said:


> They were not facilitated with this and were forced by Central Bank to take less 'risky' investments er..Banks.



With respect, they were not forced by anyone to put surplus funds anywhere. 

They should have de-risked by returning the money they could not lend to their members. 

The key issue is that some Credit Unions would have been wiped out were it not for the taxpayer guaranteeing the liability of the banks.

So also would many individuals. 

Brendan


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## NoRegretsCoyote (11 Jan 2019)

24601 said:


> There is not "implicit" support. Credit Unions are covered by the DGS, which is explicit. It's worth nothing that credit unions have a bail-in mechanism administered by the ILCU which has worked quite well, at least from the point of view of limiting the need for taxpayer support.



The DGS is not exactly 'fair' insurance. Any shortfall in the DGS comes from the taxpayer, at least in the short term.

Credit union liquidations are likely to be very heavily reliant on the DGS, as there are likely to be few or no depositors with savings over the €100k threshold.

History shows that external auditors' statements of assurance are not always a reliable signal that all is well at a credit union.

As a taxpayer, I am quite happy that credit unions are regulated by the Central Bank.


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## NoRegretsCoyote (11 Jan 2019)

Brendan Burgess said:


> They should have de-risked by returning the money they could not lend to their members.



This is totally correct. 

A credit union is a kind of grown-up savings club.

If credit unions can only lend out a quarter of their members' deposits then they should return the surplus to their members.

They are not banks which can diversify their business model or lend on the inter-bank markets.

In a zero-interest rate environment surplus savings are not much use, and only cause problems.


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## WizardDr (11 Jan 2019)

I am bit concerned at some of the myth peddling that sometimes goes on here.
1. Every bank in Ireland has 'free funds' called credit current account balances and low cost deposits and yet the myth that the 'strategic defaulter' is responsible for high rate mortgage accounts. The issue of high rate mortgages is rightly raised by Brendan else where but there in absence of analysis that simply reflects low competition and they are able to charge the highest rates because we are idiots.
2. Why should Credit Unions not be able to transact with NTMA? The Central Bank restricted the investments that Credit Union could invest in and yet never facilitated the lowest risk option - Government paper.
3. It was credit losses that caused the Banks to fail, The alleged projected credit losses did not materialise. Can we answer that.
4. This means that Credit Union lending was not so risky after the fake analytics suggested it was. 
5. The so called Regulatory Reserve at 10% is in all 'assets' and is based on nonsense and should be called out.
6. Nobody is forced to have substantial savings with Credit Unions but people see their services as equal to or better than the Banks. The online facilities are on a par with the Banks and are free.

I just thing there are some ideological views masquerading as fact here and they are coming up short.


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## 24601 (11 Jan 2019)

NoRegretsCoyote said:


> The DGS is not exactly 'fair' insurance. Any shortfall in the DGS comes from the taxpayer, at least in the short term.
> 
> Credit union liquidations are likely to be very heavily reliant on the DGS, as there are likely to be few or no depositors with savings over the €100k threshold.



Do you understand how the DGS works? Genuinely?


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## Brendan Burgess (12 Jan 2019)

Hi Wizard

You are listing out  a lot of unrelated issues. 

The fact is that Anglo and Irish Nationwide would definitely have gone bust if the government had not stepped in and guaranteed their deposits. I don't know of analysis which contradicts that.   If that had happened, the Credit Unions would have lost their deposits or a substantial part of them. 

It could be argued that the other banks were solvent, but they too would have run out of cash, so they had to be rescued.  It's likely that the depositors would have lost, although not as much they would have lost in their deposits in Anglo and Irish Nationwide. 

So the fact is that the Credit Unions were bailed out by the tax payer although they and other beneficiaries don't like to say so.

Brendan


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## NoRegretsCoyote (12 Jan 2019)

24601 said:


> Do you understand how the DGS works? Genuinely?


Yes.

A small share of the deposit base is paid into a fund which accumulates over time.

This fund is dipped into when an institution is resolved and if there is not enough funds available to make good all deposits under €100k.

My point is that the DGS contribution is microscopic compared to a credit union's deposit base and does not really constitute an incentive to behave well. A credit union in resolution will use up multiples of its contributions over the years. Likewise other credit unions could go for a century without ever needing access to it. This is why I think it is not exactly fair insurance.

Most importantly, the taxpayer is always and everywhere the residual guarantor of a DGS when there aren't enough accumulated funds. There is also the financial stability argument. If people start to think that credit union deposits won't be honoured then there could be a destabilising run on the sector.

So yes, as a taxpayer I do think that credit unions should be regulated.


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## WizardDr (12 Jan 2019)

Hi Brendan

You fail to answer or acknowledge ANY issues.

1. Did credit losses sink the Banks? Yes
2. Did credit losses sink the credit unions? No
3. Where did €500m of a rescue fund get conjured up from (hint based on analytics and then forward projections - They were doomed we were told)
4. Did Credit Unions have their lending restricted on bases of 3 above?
5. The conjured up 10% Reserve.
6. The protection of savings was a strategic issue and applied to ALL including the Banks. That is entirely a different matter as well you know.
7. Reduced Credit Union lending because of 3 resulted in temporary surplus of funds.
8. Answer why DoF will not let CU place funds with NTMA
9. Are all these relevant enough?
10. Your understanding of CUs is otherwise excellent.


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## RedOnion (12 Jan 2019)

WizardDr said:


> 6. The protection of savings was a strategic issue and applied to ALL including the Banks. That is entirely a different matter as well you know.


It's not entirely a separate issue. You seem to only look at DGS from the perspective of the deposits placed with credit unions. Brendan is talking about the benefits the CUs received from the banks being guaranteed.

The credit unions had credit risk exposure to 2 main fronts:
1. The lending to their borrowers, and
2. The credit risk of the banks they placed funds with.

If the DGS hadn't existed, and banks had been allowed to fail, credit unions would have been decimated overnight. 

There was approx 17m of Credit Union funds still invested in an IBRC product at the date of liquidation, which at the time looked unlikely they would ever get anything back. This was a drop in the ocean compared to the deposits they had, which were covered by DFS / ELG when the guarantee came in.

So, in my opinion


WizardDr said:


> 2. Did credit losses sink the credit unions?


They would have, without the guarantee.



WizardDr said:


> 7. Reduced Credit Union lending because of 3 resulted in temporary surplus of funds.


Ah now, you know the CU sector better than anyone here. Several credit unions had massive surplus funds long before the financial crisis. There's nothing temporary about it.

I don't agree with Brendan's overall analysis, but it's difficult to have a worthwhile debate about the CU sector if you fail to acknowledge that there are any issues.


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## WizardDr (12 Jan 2019)

Sorry we are at cross purposes here.

Let us be clear. It was the possible losses on the loan book that allowed the Central Bank to drive the mother and father of the greatest excessive and regulation designed to put them out of business one by one. This had nothing to do with Deposits actually. It was the loan book. So the raft of 'regulation' that placed a risk officer; a compliance officer; an internal auditor all in the equivalent of a branch of a bank was fair and equitable? And you don't think there is a case to answer by Central Bank and their defective analysis? And then CU lending was restricted?

Let me call this out. It was defective analysis. It heralded a crucifying level of regulation that had a sole purpose of forcing amalgamations when in fact it was not justified. My issue with Brendan is that he wont address those issues whilst effectively saying they are irrelevant.

The harping back to the Deposits was not of CU making (their alleged poor lending was) and the fact that all Deposits were so guaranteed was a different matter and the Government did not guarantee the deposits to simply rescue the Credit Unions. In fact I do not believe that entered the thought process. So every entity that had deposits with Banks including MNEs, firms, partnerships - by Brendan's logic they too were all bailed out and they too should have been allowed to fail and on it goes.

So then having your reputations slated, having voluntary directors restricted to only one one board (you can be on 50 SPV vehicles in IFSC), you have your lending curtailed and that all based on defective predicted analysis that was totally wrong.

So if you were jailed and it turns out you were innocent how would you feel?

Brendan has a responsibility to understand more. Dublin 4 was not exactly where the Credit Unions flourished and the Sandymount Credit Union in a shoe box would not be representative say of likes of Health Services CU. Have a look at that for Fintech and where they have gone.

Ask yourself why do the plain people place their savings with Credit Unions. None of this is forced.


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