# Regulator here has imposed a 10% Regulatory Reserve Ratio of 10% against ALL assets



## WizardDr (4 Oct 2011)

The Regulator here has imposed a 10% Regulatory Reserve Ratio of 10% against ALL assets.

Noting that the Basel III ratio when risk weightings are stripped away is THREE per cent and that if Bank of Ireland had a FOUR percent ratio they would NOT have needed a bailot, is it not time that there was a serious debate on this site as to the actions of the Registrar of Credit Unions?

This article might help

http://www.accountingnet.ie/busines...redit_union_risk_Get_rid_of_credit_unions.php


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## kaplan (4 Oct 2011)

Basle III is not designed nor intended for credit unions and this is accepted by their regulators. The 3% appears to be the leverage ratio which is an additional measure to the 8% RWA and 2.5% buffer.

Interesting article: But consider the reasons why the 10% was introduced "abruptly" - albeit with a graduated compliance date- largely to prevent credit unions raiding no-statutory reserves to fund dividends.

Think of what a traditional cu would make of a RWA approach - it would invest in low risk assets and not lend. 

The root question is : is 10% sufficient, too high or too low? CU's and their lobbyists are arguing its too high - why? Because generating the return on assets required can't be done using the existing business model which is deeply flawed. The real problem is not "reserve levels" but lending activity, core operating costs and non-diversified income (less than 1% fee income/total income)


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## CU Manager (5 Oct 2011)

Hi WizardDr,

That article articulates the issue quite well. Interesting that the author said that most cu's are in fact, well run. Some of the posts on this forum would make you think otherwise but its refreshing to get an unbiased opinion!

The big issue for me is new assets coming into the credit union. The 10% of all assets has been achieved in most credit unions and the risk to members savings is small considering that the 10% of all assets equates to over 30% of "risky" assets so the liklihood of a solvency issue in most cu's is remote.
The issue then arises, why force a blanket 10% reserve requirement on new funds coming into the CU?
CU savers are looking at state sponsored banks paying unrealistic prices for deposit money. Their CU is being restricted by the regulator from paying a decent return (through over zealous provisioning requirements coupled with overly onerous capital reserve requirements).
The only thing stopping a rate motivated run on CU savings is member loyalty. Outsiders to the movement find this hard to understand but the movement would be crippled by now if it wasnt for Joe Publics loyalty to his local CU.
The Regulator is choking the CU movement and waiting for nature to "cull" the herd.


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## kaplan (5 Oct 2011)

An RWA approach simply isn't feasible nor advisable at this time until credit unions and their regulator have the resources and competence to operate such a model.

The reserve to total asset ratio is a red herring. Balance sheets are shrinking not growing. Loans to asset ratio is down to 41%. Most cu's are at or close to 10% R/TA according to the ILCU. 

Reality is the reserves to total assets standard is the one to deal with. If balance sheets are contracting there is no requirement for additional capital (at this time). If they grow again then there will be a need for additional capital - probably supplementary as growing using retained reserves may be too slow. Perhaps the reserve ratio could be flexed or tiered with qualifying cu's operating at lower levels. 

For now there's a need to reverse the decline in lending which is driven by both demand and regulatory intervention factors : new loan issues were down on average 25% in 2009 and 2010. 

So why are lending limits being applied to 300 and not the other 109? 

To control risk taking - if it's the case that regulatory scrutiny has revealed poor lending and credit risk management practices and tightening cash flows then it's logical for a regulator to control for credit and liquidity risks. And it's logical for a regulator to insist that adequate provisions are being made including modified loans.


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## kaplan (5 Oct 2011)

You might address the merger issue on this thread


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## ajapale (5 Oct 2011)

kaplan said:


> You might address the merger issue on this thread



No, please use this one to discuss mergers/consolidation .

After delaying consolidation for years  CU's are about to have it foisted on them.

 posts relating to merger/consolidation of CU's have been moved.

aj


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## kaplan (6 Oct 2011)

This[broken link removed] might interest those who want write on credit union capital adequacy. Note the RWA ratio for Brazilian stand alone credit unions is 18%.


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## CU Manager (6 Oct 2011)

The paper is scant on detail regarding the weightings used and doesnt divulge what counts for capital reserves so its difficult to contextualise the 18% RWA
However, that 18% is a hell of a long way below the typical 31% of "risky" assets that the typical Irish CU has to hold due to the blanket 10% requirement on all assets!


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