# CU introduces cap on members shares



## Ash (19 Sep 2011)

My credit union has introduced a cap on members' shares.  Anyone currently with shares above this maximum have been told that no further deposits will be accepted and have been advised to remove any deposits above the maximum out of the credit union.  

I am fortunate enough not to have a loan at the moment and to have accumulated shares over many years.  But now my shares are above the new ceiling, and my salary is paid in monthly, increasing my shares (on a good month).  In recent time my contact with banks have been minimal (mainly credit card a/c) and I am loathe to remove money to them given everything that has happened.  

I was very happy with the credit union, it was a financial system which suited my simple needs.  But I feel this move is against the spirit and ethos of credit unions.  

Is this cap on shares common in credit unions?  I must admit I do not know if a previous, higher cap - which did not include me - existed in the CU.  Do members have to abide by this new ruling?  Is there an alternative?  Ideally I would like to let things stay as they are.


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## bullworth (19 Sep 2011)

Whats the reasoning behind a cap on members shares ? You only get one vote at the AGM no matter how many shares/money you have deposited anyway. Surely they want to keep as much cash as possible and not force people to withdraw it ? This doesnt make any sense to me.


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## Padraigb (19 Sep 2011)

The reasoning for the cap is that most Credit Unions have far more members' funds than demand for loans, so they end up putting the excess on deposit at low rates of interest. That pulls down the earnings rate, and is one of the reasons why CUs have been paying low dividends.


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## Bronte (19 Sep 2011)

The whole world has gone mad. I've never heard that a CU won't allow people to save, how ridiculous is that. 

On another note we are being told people can't get loans from anybody, and that credit unions are not allowed to loan, and now we hear that people are not applying for loans.

Ash probably it's time for you to open an account with another credit union.  Also could you tell us what is the limit in your credit union.


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## Slim (19 Sep 2011)

Ash said:


> Is this cap on shares common in credit unions? I must admit I do not know if a previous, higher cap - which did not include me - existed in the CU. Do members have to abide by this new ruling? Is there an alternative? Ideally I would like to let things stay as they are.


 
I wouldn't say it is common but we did it a few years ago. The rationale is that credit unions are required to hold an amount equivalent to 10% of savings in a statutory reserve. This reserve comes from surpluses year on year. When the Euro currency came in in January 2002, there was a huge influx of funds into CUs. This puts pressure on CUs to earn surplus with diminishing investment returns and falling loans plus greater bad debt provisions.

I would suggest you pull out some funds and deposit them with An Post, EBS or some other term deposit that will probably earn you more than the CU. 

Incidentally, when we did it we allowed existing funds to remain in situ indefinitely but would not allow any further increases. Slim

Note: I am a director of the CU.


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## ClubMan (19 Sep 2011)

Slim said:


> I would suggest you pull out some funds and deposit them with An Post, EBS or some other term deposit that will probably earn you more than the CU.


Or if you have a loan then consider reducing/clearing it with any money that you have in shares.

How to set your Credit Union shares against your loan

Edit: just noticed that the original poster clarifies that they do NOT have a _CU _loan outstanding.


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## STEINER (19 Sep 2011)

my wifes CU in Dublin has a 50k share limit for a few years now and I think last years dividend was 2%. I am in another CU, but I don't know of any limit there as I am nowhere near 50k in shares.


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## ClubMan (19 Sep 2011)

Looks like the policy varies from _CU _to _CU _alright.


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## Leaky1 (19 Sep 2011)

ClubMan said:


> Looks like the policy varies from _CU _to _CU _alright.



Should this limit have been notified to people when they opened their account? My own credit union hasn't ever mentioned it.

Sorry to go slightly off-topic but several of those google results say that your shares are protected under the Savings Protection Scheme up to a max of €12700 in all credit unions participating in the Scheme. This is the first I have heard of this, does this mean that any savings I have in excess of that limit are unprotected? Or if my credit union doesn't participate in the Scheme that none of my savings are protected. Confused now.


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## bullworth (19 Sep 2011)

Leaky1 said:


> Should this limit have been notified to people when they opened their account? My own credit union hasn't ever mentioned it.
> 
> Sorry to go slightly off-topic but several of those google results say that your shares are protected under the Savings Protection Scheme up to a max of €12700 in all credit unions participating in the Scheme. This is the first I have heard of this, does this mean that any savings I have in excess of that limit are unprotected? Or if my credit union doesn't participate in the Scheme that none of my savings are protected. Confused now.




In my credit union theres also supposed to be life insurance insurance on shares deposited depending on the age you were when you deposited. Something like 3 times deposits under 30 years of age , 2 times if you deposited when over 30 years of age etc. I have no idea who pays for this either if not the credit union.


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## ClubMan (20 Sep 2011)

General information on the "free" and paid insurance cover available to _CU _members is outlined here:

http://www.creditunion.ie/whatweoffer/insurance/#d.en.153

The specifics of such cover may vary across different _CUs_ so check your local _CU's _rules if in doubt. I'd imagine that such information may be available online in some (many?) cases.


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## ClubMan (20 Sep 2011)

bullworth said:


> I have no idea who pays for this either if not the credit union.


The _CU _tends to describe this as "free" insurance cover but ultimately you as a member pay for it somehow. _TINSTAAFL_!.


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## Slim (20 Sep 2011)

Leaky1 said:


> Should this limit have been notified to people when they opened their account? My own credit union hasn't ever mentioned it.
> 
> Sorry to go slightly off-topic but several of those google results say that your shares are protected under the Savings Protection Scheme up to a max of €12700 in all credit unions participating in the Scheme. This is the first I have heard of this, does this mean that any savings I have in excess of that limit are unprotected? Or if my credit union doesn't participate in the Scheme that none of my savings are protected. Confused now.


 
That figure is out of date. All credit union savings are protected to a maximum of €100,000 per member under the Deposit Guarantee Scheme. The Savings Protection Scheme is a very controversial issue in the credit union movement. It is primarily used to guarantee and underpin the operations of credit unions that may be in difficulty. The deposit guarantee scheme would only kick in if a ctredit union is wound up.

Each CU is autonomous within the terms of the Rules and Act. Each can set a maximum savings limit or none. They certainly should inform members on joining.


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## ClubMan (20 Sep 2011)

Slim said:


> Each CU is autonomous within the terms of the Rules and Act. Each can set a maximum savings limit or none. They certainly should inform members on joining.


As a matter of course do they give new members a rules booklet? Whether or not most people actually read it is another matter...


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## CU Manager (20 Sep 2011)

ClubMan said:


> As a matter of course do they give new members a rules booklet? Whether or not most people actually read it is another matter...


Most CU's do not offer a rulebook to new members. There is definitely a democratic deficit in our member owned credit unions with most members assuming that we are all branches of a central entity. I think it suits some CU activists that members are ignorant of the workings of their CU. A CU with 20,000 members might only get 200 at the AGM and a significant proportion of the 200 would be existing board members, staff, their families and friends!


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## kaplan (22 Sep 2011)

Capping shares/deposits is for balance sheet management as is limiting lending amounts. 

A credit union, just like a bank, must maintain capital buffers -reserves. The  minimum level of reserves is regulated by the Central Bank and set at this time at 10% of total assets. Assets are made up of loans and investments backed by (funded by) shares & deposits (liabilities). If the level of funding increases then the credit union lends or invest these funds to generate a return which if higher than the cost of running the business is used to (a) maintain reserves at the 10% and (b) fund investments in infrastructure and (c) pay a dividend. Right now many credit unions are just about managing to fund (a) - some are not.

If savings increase then this leads to an increase in assets which means the credit union must generate enough profit to fund the increase in reserves. For example a credit union has €50m in assets and reserves of €5m (10%). If it takes in €5m in savings its assets will increase to €55m. It must now have €5.5m in reserves. 

The problem for many is they are finding it difficult to maintain the 10% reserve ratio - and as they cannot generate the profits needed they are shrinking the balance sheet -hence deposit and lending limits.


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## CU Manager (22 Sep 2011)

kaplan said:


> Capping shares/deposits is for balance sheet management as is limiting lending amounts.
> 
> A credit union, just like a bank, must maintain capital buffers -reserves. The minimum level of reserves is regulated by the Central Bank and set at this time at 10% of total assets. Assets are made up of loans and investments backed by (funded by) shares & deposits (liabilities). If the level of funding increases then the credit union lends or invest these funds to generate a return which if higher than the cost of running the business is used to (a) maintain reserves at the 10% and (b) fund investments in infrastructure and (c) pay a dividend. Right now many credit unions are just about managing to fund (a) - some are not.
> 
> ...


 
You seem to ignore the fact that the reserve requirement is totally inappropriate and unrealistic for new funds coming into the credit union.
E.g. member lodges €50K new funds into the CU. Ceteris paribus this means the CU must provide €5K in new reserves, despite (a) its impossible to make €5K return on the €50K lodged in the year lodges and (b) the complete lack of risk weighting for what the CU does with the €50K - the CU might put the €50K in a capital guaranteed deposit a/c with no risk to the funds deposited - no need for €5K buffer. 
Your thoughts on this specific example?


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## kaplan (23 Sep 2011)

@CUManager 
My post dealt with why credit unions were capping shares not the 10% reserve requirement which the regulatory minimum. Well run credit unions should of course plan for higher levels to provide the headroom for growth.


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## kaplan (23 Sep 2011)

CU Manager said:


> You seem to ignore the fact that the reserve requirement is totally inappropriate and unrealistic for new funds coming into the credit union.
> E.g. member lodges €50K new funds into the CU. Ceteris paribus this means the CU must provide €5K in new reserves, despite (a) its impossible to make €5K return on the €50K lodged in the year lodges and (b) the complete lack of risk weighting for what the CU does with the €50K - the CU might put the €50K in a capital guaranteed deposit a/c with no risk to the funds deposited - no need for €5K buffer.
> Your thoughts on this specific example?



Your question on capital allocation illustrates everything that is wrong with Irish credit unionism. The idea of taking in funds from the public to then place them on deposit with a bank is to say that “credit” unions are “savings” unions that might lend some of their money.  Which is of course why they are in trouble – they are running the business as a quasi investment club for savers. 

The answer lies in one word CREDIT. A credit unions’ legal, economic and societal objective -the reason why it exists - is to make loans from household savings. Its loan to deposit ratio should be over 80%. But in this country only 45% of retail funds were used to make loans. The balance was invested in other financial institutions and the stock and bond markets.  

No where else on the planet has the credit co-operative model been subverted in the way it has here in Ireland. 

This is why Irish credit union’s directors and managers have undermined the financial stability of the business they were responsible for and have exposed savers funds to an imprudent level of risk. Stuck as they cannot unwind safely from years of stupidity, they are blaming everyone else for the problems they are singularly responsible for creating.


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## CU Manager (25 Sep 2011)

@Kaplan - the thread is about cu's putting a cap on shares. The barmy blanket 10% reserve is a very relevant issue providing context for savings caps. 
My example of new cash coming into a CU and being placed on deposit was to highlight the stupidity of a blanket reserve requirement that is not risk weighted. The same scenario exists for "within shares/secured" loans - the reserve requirement is out of kilter with the underlying risk and therefore a CU is not "rewarded" for minimising risk.
Of course, instead of debating this point, you instead jump on yet another tirade of negativity. Using terms like "years of stupidity" to describe how CU's have been run, is just out-of-context opportunism to further your anti-credit union agenda. 
The context being that all the domestic banks and building societies going bust and being bailed out.
Again I must remind you that the collapse of the financial ecosystem was a failure of the political and regulatory establishment in Ireland. You appear to be prepared to consider the recession, unemployment and the effective bankruptcy of our country to be inconsequential - i.e. that CU's brought everything upon themselves!
Try to be objective please and comment on the non risk weighted reserve requirement!


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## kaplan (25 Sep 2011)

@CUManager: The problem is not the reserve requirement level at 10% - the problem lies with the introduction of the risk based capital standard itself. Once this was done it placed the legal entity of the credit union as a stakeholder smack bang in the middle of the board table and forced directors and managers to consider the long term sustainability of the business. Until then the business was run predominantly for saver's benefit through the dividend distribution model that focusses on year end performance and dividend declarations at AGM's.


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## CU Manager (26 Sep 2011)

so you support the regulators lazy, one size fits all, capital requirement then do you?


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## kaplan (26 Sep 2011)

@CUManager: Regulators will adopt a conservative approach to capital and credit institutions a less conservative approach. You are attacking the regulator for being lazy etc yet when asked what you consider to be an adequate level of capital you haven't responded. Rather than attacking why not try and state your case and support it with relevant argument ?


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## CU Manager (26 Sep 2011)

I do not attack, please refrainfrom using such provocative language!
The capital requirement would be based on a standardised risk assessment formula to be developed.
The formula would have variables which recognise risk mitigation. It would be a complex enough formula so I am not going to go into too much detail here. Safe to say that it would differ from the current lazy approach in that, for a start the following would result in a lower capital reserve/solvency buffer:
Good ALM practices
Capital security of assets i.e. investments
Loan book diversification
Attached savings
Provisioning levels
General Delinquency experience

Other less tangible or measurable factors would also come into play as well as scores for qualifications and experience of management.

I am more concerned with the capital reserve requirements of fresh funds coming into the CU as this is a major factor on sustainability and a CU's ability to grow. 
It is always prudent to grow capital reserves as resources allow but to require a blanket 10% in year 1 for fresh funds is not reasonable. It doesnt affect CU's right now as most are just maintaining their asset size - withdrawals are, by and large being matched by lodgements but this will not be the position forever and CU's will need to grow and attract new funds.


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## kaplan (26 Sep 2011)

@CUManager: credit co-operatives elsewhere attract wholesale funding. A group of credit unions in Australia recently raised tens of millions in external capital of which attracted a AAA rating. 
The current approach is not lazy rather it realistically uses a widely used leverage ratio mechanism. Your write of a complex formula - do you really believe that credit unions would have the competence to apply a Basle 11 or 111 approach? You are also writing of  quite complex developed rating and supervision systems similar to those used in the U.S. which trigger mandatory, prompt corrective regulatory action to mitigate risks. Rather than argue for complexity it might be better to consider the 10% leverage ratio and how this might be flexed. Recall the extended loan limits regime (2007) introduced the notion of flexibility linked to prudential standards. You may have a strong case to make but it won't be helped by attacking the regulator for being lazy.


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## CU Manager (26 Sep 2011)

I have called the actions of the regulator lazy on an anonymous forum, it hardly lessens my case!
I dont see Irish CU's accessing wholesale funding markets even in a post consolidation environment. The Austalian movement is not comparable to the Irish situation
Going back to basic principles of community savings being lent out to borrowers in that community - I dont see the answer to capital reseves being asking outsiders to invest (at what coupon rate!) so that the risk is shared and bondholers can get burnt. The Irish government had to withdraw from the bond market so I dont see CU's realistically being able to raise funds this way! and even if they could, why would they want to pay yields of 8-14% when we cant lend the funds we have right now at lower rates!


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## kaplan (26 Sep 2011)

I mentioned the Australian case as but one example of other ways to fund reserve requirements - of course cu's here are no where near being able to use alternatives which is why they are in such a pickle. (The 1997 CU act allows for alternatives)

You remain reluctant to indicate what level of reserves you would deem appropriate for the current and anticipated trading risk scenario.


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## CU Manager (26 Sep 2011)

Outside capital is years off if it ever becomes a feature and outside risk taker require reward. I'm not sure thats in keeping with the CU ethos as the payment of such risk premiums would be paid for by the borrowers in our community - it would in effect take money out of the community. Not exactly desirable outcome for a community based co-operative!

The issue of reserves at present is not that simple.
The bizarre provisioning requirements imposed by the regulator together with the 10% solvency buffer are overly onerous. Provisioning and reserving are two sides of the same coin.
Requiring provision for perfectly performing extended term loans in the middle of a severe recession is over regulation.
To then apply a 10% solvency buffer on top of that regardless of whether the funds are held in cash deposits or in loans covered by savings (partly or fully) is over regulation.
The art of regulation is to allow the industry to function without undue risk of failure. The easy way to ensure no risk of financial failure is to over provide on loans and over provide on solvency buffers - but ignore the effect hat this has on the industry to perform it function to serve the needs of its members.


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## kaplan (26 Sep 2011)

@CUManager: Welcome to the world of co-operative banking where capital constraints force managers to pay proper attention to the long term sustainability of the business. Suggest switching the discussion here to this thread which is considering capitalisation.


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## ajapale (26 Sep 2011)

Can we keep this thread (in so far as is possible) to discuss the CU cap on members shares and its implications for CU members and stakeholders?

If we cant achieve this then Im afraid that every CU thread in the forum will end up as a generalised discussion and some very interesting aspects will be lost.

Thanks
aj


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## kaplan (26 Sep 2011)

Back to the thread - here's my tuppence worth:

The reason why credit unions are capping share balances is because they haven’t sufficient capital to fund balance sheet growth. 

Deposit (liability) growth is translated into assets (loans or investments) on their balance sheet and these assets require a regulatory reserve (capital buffer) support of 10%. The implication for their customers is they will or in some cases have become zombie credit unions unable to accept deposits and unable to lend.

Irish credit unions only generate capital from operating profits. Because they are experiencing hefty loan and investment losses and providing for anticipated losses, profits have plummeted. This is seen in the numbers unable to pay any dividend (80+) and numbers paying less than 1% (200) last year. Three hundred have lending restrictions applied by the regulator to control for credit and liquidity risks.

They are two other fundamental problems that pre-date 2008. They are operating a high cost model having failed to deploy modern technologies and haven’t achieved the size needed to (a) realise economies of scale which would allow them drive down costs/increase profits and (b) realise economies of scope allowing them to widen and deepen their products and services –which would address their reliance on interest income by increasing fee income.

The underlying issue is there are too many non-viable operations that should either consolidate into bigger credit unions or be closed down. Consolidation is needed to bolster balance sheets and ensure capital adequacy. Post-merger stabilisation (capital) funding will be needed to plug holes in the balance sheet i.e. impaired loan and investment assets.  

But even when bolted together, consolidated credit unions may need more fresh capital which may have to come from the Government. This would kick start lending and allow them to expand their balance sheets. Consolidation would also allow them to realise both scale and scope economies, increase profits and begin to retire government support over time.

The implication for stakeholders is: will consolidation be merely a crisis management tool or will it be used to get credit unions operating as modern efficient and sustainable credit co-operative savings and loans institutions.


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## Bronte (7 Oct 2011)

From today's news it seems there is a black hole in the credit unions of 1 billion.


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