# Credit Union Savings Protection



## Brendan Burgess (16 Feb 2007)

Senator Joe O'Toole  Publishes Credit Union Savings Protection Bill​ ​ *Thursday,  15th February:* Senator Joe O'Toole today published a Private  Members Bill, the Credit Unions Savings Protection Bill 2007. The Bill will give  statutory protection to credit union members' savings. This is urgently required  to ensure that credit union deposit holders can have the same level of  protection as is provided to deposit holders of Irish banks and building  societies since 1995. 

With consumers' credit union savings  amounting to over €12  billion, it is vital that credit union savers have the trust and  confidence in credit unions and the savings protection they offer. While banks  and building societies by law have a Deposit Insurance Scheme to protect the  savings of customers, such provision does not exist for Irish credit unions. The  two million credit union members expect that their savings have the same  protection as banks and building societies, but for over 12 years this has not  been the case. This will now be addressed by the Credit Union Savings Protection  Bill. 

*Senator Joe  O'Toole said:*
*"My intention is  to see the Credit Union Movement go from strength to strength  *so we need to tidy things up. The purpose of the  Credit Union Savings Protection Bill is to correct this anomaly; to safeguard  consumers' €12 billion credit union savings, should a credit union meet with  financial difficulty. The Bill responds to heightened consumer concern and  provides consumers with the same right as deposit holders with other financial  institutions." 

"Serving the needs of nearly half  the population, the credit union movement is an immensely important part of  Irish life, giving ordinary people a better deal on financial services. It is  therefore urgently required that adequate credit union savings protection is in  place", added Senator O'Toole. 

"As a founder member of a major  credit union myself and with many years experience of the credit union movement  I believe this Bill will strengthen and re-affirm the importance of credit  unions to Irish society at a time when we are seeing the slow exit of mutual  Building Societies from the Financial Services sector. In that regard I would  seek the support of the Regulator and the Minister for Finance to support the  aims of this Bill."


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## Brendan Burgess (16 Feb 2007)

*Re: Credit Unioin Savings Protection*

This is a very important subject with two completely different views held by the Irish League of Credit Unions and The Credit Union Development Association. 

The ILCU currently has a Savings Protection Scheme which is used to help out credit unions which face liquidity problems. So it helped out Firhouse Credit Union a few years ago and it may have helped Monaghan Credit Union recently. But it's a non statutory scheme.  It's at the discretion of the directors whether they help out a member credit union or not. 

CUDA wants a Deposit Guarantee Scheme as proposed in O'Toole's bill. I think this would only come into play after a credit union has gone bust and would guarantee the savings up to €12,700. 

I wonder which is better?


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## Howard (17 Feb 2007)

*Re: Credit Unioin Savings Protection*

Brendan, where did you get the figure of 12,700 from? If the bill is supposed to offer the same level of protection for Credit Unions as there currently is for banks then shouldn't the figure be closer to the 20,000 mark? As far as i know the figure you mention of 12,700 is the amount which the Irish League of Credit Unions offers in its OPTIONAL savings protection scheme.


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## Brendan Burgess (17 Feb 2007)

*Re: Credit Unioin Savings Protection*

Hi Howard

You are right. I had confused the two. 

The amount is not that critical. I am interested in people's opinions on the principles involved. 

Brendan


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## Riddler (24 Feb 2007)

*Re: Credit Unioin Savings Protection*

Brendan, Howard

In my opinion the Bill proposes a well designed savings compensation scheme in line with international best practice as endorsed by the IMF,Financial Stability Forum, EU and others.

The objectives of any scheme are to support financial stability and encourage savers confidence in financial institutions. There are many forms from an outright guarantee by Government of all deposits to no guranantee at all. The preferred option internationally is what is called an explicit,limited form of gurantee which should be government backed in all but the strongest of financial systems.

This is what we have in Ireland with the banks and building societies. It is explicit ie €20,000, limited ie 90% of savings to a maximum of €20,000 and guaranteed under statute. It is government backed to the extent that (a) its covered under law ...a legal entitlement and (b) supported via the Central Bank which also acts as a lender of last resort etc.
Of course it also complies with EC Directives. It is designed to deal with all eventualities including catastrophic failure.

But as far as credit unions are concerned there is no statutory scheme despite there being a legal requirement for all credit unions to participate in a regulated and approved savings protection scheme under the 1997 Credit Union Act. 

This means that the savings of nearly 2m people amounting to c€12bn are not protected.The overall figures are large....but think of this. Across the country there are individual regulated firms (Credit Unions) with whom a large proportion of the local population save. 

Many of these individual firms have well over €50m and some nearly €250m of peoples savings within a small cachement area called a common bond which is about a 5-15 mile radious. Just imagine the catastrophe that would enfold if one or more of these got into trouble and closed their doors. 

Well in Rhode Island in 1992 this is just what happened. The private savings protection scheme owned and operated by the credit unions failed and within days Rhode Island state ordered all credit unions to close their doors such was the scale of the contagious run that had broken out. Many of these credit unions never opened their doors again and that included some of the best ones. There is much to be learned from this story where many of the people involved see the similar early warning signs emerge here. (Bad loans and risky investments)

So what about the ILCU SPS. The first thing that crops up is what is it ? 

It is not savings compensation (deposit insurance) ...it does not legally compensate savers in the event of the failure of a credit union. Although for years the ILCU has portrayed the scheme as doing so: but it's literature actually says that a sub-commitee of the board of the ILCU (an unregulated unincorporated entity) may at its sole discretion pay upwards of €12,700 in the event of the failure of a credit union. BUT more recently the ILCU is now saying that the scheme was only ever a stabilisation fund : Now what's a stabilisation fund. All it is, is a fund assembled by the ILCU which may be , again at its sole discretion used to bail out a troubled credit union. So it's a discretionary fund only and there is no legal entitlement to assistance or compensation. 

The difference between stabilisation and desposit insurance is this. If I say I will help your family out if you die ..this is a promise I might keep in other words stabilisation. If I say I will guarantee to pay €100,000 to your family when you die ....this is deposit insurance. 

In practice deposit insurance can also provide for what is called risk minimisation where it is sometimes cheaper to assist a troubled credit union, but only if it it work out its problems, than to let it fail and pay out compensation. This is what is being provided for under the new Bill (financial assistance).

So desposit insurance may provide for a form of stabilisation (and this is allowed for under best practice) BUT stabilisation never provides for deposit insurance.

In no other country would a trade body such as the ILCU be allowed to provide for compensation for savers in the event of the failure of one of its member organisations. The conflict of interest and risk of forebearance and moral hazard is simply too large. 

Its quite abundantly clear that the business of providing compensation to savers (deposit insurance) is the business of the state and not of a trade body. This is why the Bill makes so much sense in a modern Ireland requiring proper consumer protection that is legally enforceable and backed by the state through its statutes and structures.

In the only private scheme, a mutual owned by credit unions, left in the US (covering the savings of 200 odd credit unions of c$15bn in sector of 9500 credit unions) the US GAO in a report to Congress recently concluded that it was deficient to the extent that it wouldn't be capable of handing a systemic crisis. 

More recently the ILCU has contended that a statutory scheme such as that proposed in the O'Toole Bill would in some way disenfranchise its member organisatons in the North and therefore there has to be an all Ireland solution. This is quite frankly rank balderdash. 

In the first place the ILCU only represents just over 50% of credit unions in the North, in the second the British government wisely brought UK credit unions under its scheme in 2000 despite no legal requirement to do so.There is no reason why it couldn't extent coverage into the North. In the third place to suggest that the Government of this state should deny it's citizens legal protection for their savings because a trade body's self-interests and objections is nonsense. 



Riddler


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## Riddler (6 Mar 2007)

Update on the Bill

The second stage was heard in the Seanad last week during which it appears the Minister whilst accepting the thrust of the Bill was anxious to allow time to see if the ILCU could cobble together a reform proposal to their scheme that could in turn be approved by the Regulator. On this basis O'Toole withdrew his Bill which means of course that he can always re-introduce it at some later stage. So for now it's all eyes on the ILCU who have a deadline of the 31st March to meet. 

The full text of the debate in the Seanad can be found here: 
http://debates.oireachtas.ie/DDebate.aspx?F=SEN20070301.xml&Node=H5#H5

Riddler


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