# 10% Reserve Ratio



## WizardDr (1 Oct 2020)

I noted once again in the Financial Times which referred to the equivalent ratio for Banks in Europe and the requirement to
have their ratio at 3% of Total Assets and allowing €1Tn (trillion) to be excluded from the assets figures.

I emailed the World Council of Credit Unions about 10% ratio and the reply was that the bigger the ratio the better (that part is true) but the 10% Ratio was not a recommendation  of theirs but they say a big ratio is a good thing,

The Central Bank in one of their quirky memos suggest that they are following best practice.

Ultimately this this ratio means unless CU profitability is 10% of additional assets each year, the ratio will _ipso facto_ trend downwards to 10% and under.

This ratio is lunacy and its author should be called out.

We now have the situation of CUs refusing deposits are placed in Bank (asset) .

CBI have not been challenged on this as many credit unions are well capitalised.


This ratio is three times the 'preferred' ratio for Banks.


(BB if you reply - focus on the ratio and avoid the fact that it a CU - assume its financial institution).


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## Brendan Burgess (1 Oct 2020)

WizardDr said:


> BB if you reply



Maybe you should draft the reply for me? 

BB


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## Brendan Burgess (1 Oct 2020)

I have given up on Credit Unions

They just don't want to reform their lending practices or their business model. 

They get the regulator they deserve. 

Brendan


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## Pinoy adventure (1 Oct 2020)

Brendan I though the credit unions have 1 of the best lending policy's out there.


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## Brendan Burgess (1 Oct 2020)

Hi Pinoy 

They have ridiculously high effective interest rates. 

They encourage their members who have money on deposit to leave it there and borrow. 

If a regulated bank did that, they would get into trouble with the regulator.

Brendan


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## WizardDr (1 Oct 2020)

I would like you just to look at the percentage (10) -v- percentage (3%).

And tell me why a CU should have a ratio that size which by the way means its RoE is also ludicrously high.

Keep the 'entity' out of it please


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## Protocol (1 Oct 2020)

If CU have too much deposits, and not enough loans, then why do my local CUs still charge in the range 6.9% - 8.9%?

If they want to compete with PCP, and make more profit than getting 0% putting savings into banks, then lend at 2.9% / 3.9% / 4.9%.


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## Pinoy adventure (1 Oct 2020)

Protocol said:


> If CU have too much deposits, and not enough loans, then why do my local CUs still charge in the range 6.9% - 8.9%?
> 
> If they want to compete with PCP, and make more profit than getting 0% putting savings into banks, then lend at 2.9% / 3.9% / 4.9%.



Both aib and ulster bank personal loans are coming is around 8% while the CU are coming in around 7% which although is high is slightly better than the banks


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## Brendan Burgess (1 Oct 2020)

Pinoy adventure said:


> while the CU are coming in around 7%



Hi Pinoy

They are misleading you. Most credit unions require you to have shares. 

So let's say you have 
€10k @ 7%  = €700 
€3k  shares@0%
Net €7k
Effective interest rate: 10% 

And after a few years, you have reduced the €10k to €5k but still have €3k in shares, so you are pay €350 interest on €2k of net borrowing or 17.5%

Brendan


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## WizardDr (1 Oct 2020)

I see Mr B won't answer the straight question.

Why is Ratio 10% for CU and desired to be 3% (which most of them are bot even near). 

I await.


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## Brendan Burgess (1 Oct 2020)

Hi Merlin 

I have told you that I have given up on the Credit Unions.  I have wasted a huge amount of time over the years trying to help them reform but to no avail.

I don't agree with the CB approach, but as I have already said , they get the regulator they deserve. 

Of course, if anyone has questions from  a consumer point of view about credit unions, I would answer them.

Brendan


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## WizardDr (1 Oct 2020)

But Mr. Putin the fact that you were born with a silver spoon, has not stopped you commenting wildly, widely and unwisely at times on various matters I would have thought that you could comment on the vindictive abuse by the CBI in employing a ratio so high despite your tendency to be racist about Credit Unions and their lifestyle (I am assuming the Credit Union is a person) on their being able to exist.

Would you, could you say something on the fairness of the Ratio?

For example had Bank of Ireland had a ratio of 3% they would not have gone bust.

etc.


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## Brendan Burgess (1 Oct 2020)

Hi Merlin

I have spent a lot of time helping the Credit Unions and they never ever listened. I resolved some time ago that I would not waste any more time.

If they ever cop themselves on by setting shares and deposits against loans and by returning unwanted cash to savers, then I probably would get involved again because I do believe in community , consumer based lending. But that is not what they do.

Brendan


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## WizardDr (1 Oct 2020)

Mr Putin 

You are dodging the bullet and as an anorak for consumer issues - I am merely asking you on  the morality of the 10% ratio.


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## Brendan Burgess (1 Oct 2020)

WizardDr said:


> an anorak for consumer issues



Excuse me!  That is not an anorak, it's a ski jacket. 

Brendan


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## Pinoy adventure (1 Oct 2020)

Brendan Burgess said:


> Hi Pinoy
> 
> They are misleading you. Most credit unions require you to have shares.
> 
> ...



What would your thoughts be on loans within shares ? 
Let's assume a person has 10k shares and wants too borrow 8k against there shares.good or bad idea ? Vrs withdrawing your shares are paying back weekly into your own account


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## Brendan Burgess (1 Oct 2020)

You should never borrow money when you have money on deposit. 

If you borrow €8k @7%, you will be paying €560 interest while having a net €2,000 on deposit! 

No wonder the credit unions are so profitable if they can sell this idea.

Brendan


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## vandriver (1 Oct 2020)

Brendan Burgess said:


> You should never borrow money when you have money on deposit.
> 
> If you borrow €8k @7%, you will be paying €560 interest while having a net €2,000 on deposit!
> 
> ...


It makes no sense to a financially responsible , financially secure person.
It might make a whole lot of sense if you doubt your discipline in repaying the capital withdrawn,because obviously a loan _has _to be repaid.


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## Jim2007 (1 Oct 2020)

WizardDr said:


> Ultimately *this this ratio means unless CU profitability is 10% of additional assets each year*, the ratio will _ipso facto_ trend downwards to 10% and under.



What are you trying to say????  The reserve ratio for banks refers to the about of AMU that a bank needs to hold in cash and the T1 ratio determines the capital ratio, neither of which have anything to do with profitability e, which really is not surprising given that profitability includes the accruals concept etc...


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## WizardDr (2 Oct 2020)

What I am trying to say is find any Bank in the world that has reserves of 10% of Total Assets and the answer will be ZERO.
That is the issue. Continue down the line 9, 8, 7 ,  and its still NIL ZERO ZILCH

The way the  CBI have used this ratio is  based on a fundamental deliberate deception.


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## Jim2007 (2 Oct 2020)

WizardDr said:


> What I am trying to say is find any Bank in the world that has reserves of 10% of Total Assets and the answer will be ZERO.
> That is the issue. Continue down the line 9, 8, 7 ,  and its still NIL ZERO ZILCH
> 
> The way the  CBI have used this ratio is  based on a fundamental deliberate deception.



You have not got the foggiest idea of what you are talking about.


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## county (3 Oct 2020)

There doesn't appear to be any science behind the calculation of the 10% ratio and it doesn't differentiate between a credit union lending and investing in riskier assets as opposed to a credit union involved in less riskier activities.
It is a poor reflection of our governing institutions when the owners of a credit union (its members) are prevented from placing their own monies with it because of a capital ratio % that appears to have been pulled out of a hat.


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## WizardDr (4 Oct 2020)

Hi Jim2007

Assume a Credit Union reserve  is at exactly 10% of its assets.

It is the beneficiary of €1m from a Mr Brendan Burgess a well known consumer advocate who signs it over as a philanthropist.

That Credit Unions assets rise by €1m.  It breaks even precisely and it cannot lend. 

It still must find €100,000 in actual reserves as the definition is so narrow of 'capital' that only retained profits can count.

It will have to return the gift.

Now simply translate this to Shares with the same facts.

Then ask any Credit Union why they either paid back shares on a compulsory basis or capped the shares.


Gradual extinction by the hand of CBI who think they are doing God's work.


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## 24601 (5 Oct 2020)

The credit union business model in Ireland is deeply flawed and the issues raised by Brendan are fair albeit lacking the nuance an understanding of the membership profile of credit unions.


WizardDr said:


> Hi Jim2007
> 
> Assume a Credit Union reserve  is at exactly 10% of its assets.
> 
> ...



Except that a gift from a philanthropist would be booked as income and not accounted for on the balance sheet. Indeed, that credit union's reserves would rise significantly in such a scenario assuming it doesn't distribute the windfall back to members. I get what you're saying though.

In any event, I agree that the 10% requirement is too rigid, and is especially high given the risk profile of a typical Irish credit union. The composition of their collective investment portfolios and the relative improvement in loan book quality in recent years renders such a high, static requirement at odds with what is a fairly simple business model. Most of the reserve requirement flows from savings that are ultimately held in cash or put on deposit in Irish banks, with the balance put into very restrictive, low risk products. That being said, whether the requirement is 10% or ~8%, the underlying issue is that the business model doesn't work. With the exception of a few industrial credit unions, pretty much every credit union can only lend out 15 - 30% of their assets, and that isn't some recent phenomenon. 

Credit Unions are facing into a period of huge uncertainty. Lending volumes will contract massively in 2021. Loan repayments for existing loans will increase. Consequently loan books will start dropping like a stone next year. Arrears will also increase with a huge draw on the bottom line to fund the required increases in bad debt provisions. Savings will probably continue to rise and yields on deposits and investments are trending negative. Lets not even mention Brexit. 

Boards of credit unions can't sit on their hands hoping to be saved by the Central Bank or politicians, they need to act now, and a very simple strategy is to introduce a very low cap on savings to offset the capital risk. They should be doing this regardless of what the reserve requirement is. Hand people back their money if you can't do anything with it! Some of them won't thank you for it but it's very likely that they were never going to borrow from you anyway!


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## NoRegretsCoyote (5 Oct 2020)

24601 said:


> Hand people back their money if you can't do anything with it!



How do you hand back money to people whose only account is with a credit union?

_"Dear member. We no longer need your money. Please turn up on Tuesday morning and we will give you €10,000 in cash."_

There are tens if not hundreds of thousands of adults in Ireland who do not have an account with a bank, and do with a credit union.


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## 24601 (5 Oct 2020)

NoRegretsCoyote said:


> How do you hand back money to people whose only account is with a credit union?
> 
> _"Dear member. We no longer need your money. Please turn up on Tuesday morning and we will give you €10,000 in cash."_
> 
> There are tens if not hundreds of thousands of adults in Ireland who do not have an account with a bank, and do with a credit union.



Well, you don't. But the vast majority of credit union members have a bank account so they'd capture most people. Depending on how aggressively they want to implement the cap they can just write a cheque and leave members figure it out, but most are making an allowance for the genuinely unbanked. 

If it's a choice between protecting the viability of the credit union and facilitating a small % members with larger saving balances it seems reasonable to inconvenience the "large" savers. It really is quite easy for them to open a current account.


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## WizardDr (5 Oct 2020)

24601 said:


> The credit union business model in Ireland is deeply flawed and the issues raised by Brendan are fair albeit lacking the nuance an understanding of the membership profile of credit unions.
> 
> 
> Except that a gift from a philanthropist would be booked as income and not accounted for on the balance sheet. Indeed, that credit union's reserves would rise significantly in such a scenario assuming it doesn't distribute the windfall back to members. I get what you're saying though.
> ...


Debit Bank
Credit Income.

The receipt of the money increases assets - that is my point,


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## Pinoy adventure (5 Oct 2020)

24601 said:


> Well, you don't. But the vast majority of credit union members have a bank account so they'd capture most people. Depending on how aggressively they want to implement the cap they can just write a cheque and leave members figure it out, but most are making an allowance for the genuinely unbanked.
> 
> If it's a choice between protecting the viability of the credit union and facilitating a small % members with larger saving balances it seems reasonable to inconvenience the "large" savers. It really is quite easy for them to open a current account.




Them large savers who do open a current account may think twice once they see the bank fees coming out each month or quarter


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## 24601 (5 Oct 2020)

Pinoy adventure said:


> Them large savers who do open a current account may think twice once they see the bank fees coming out each month or quarter



May think twice about what exactly?


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## Pinoy adventure (5 Oct 2020)

24601 said:


> May think twice about what exactly?



The bank fees they may be charged,either monthly or quarterly


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## WizardDr (6 Oct 2020)

The moderator(s) delete posting if its off topic.  SEE ABOVE for inconsistencies.


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