# Credit Unions may need €500m in taxpayers funds



## kaplan (26 Sep 2011)

It appears that credit unions are to get €500m in tax-payer capitalisation funding  which in in line with analyst's predictions. It also appears that [broken link removed] will pose problems this year.

The SINDO article mentions fears that 200 would have to close - perhaps this is confusing the likely scale of mergers with outright closure/liquidation.

As yet credit unions have not been required to pay for coverage under the deposit guarantee scheme through which savers are covered for upwards of €100,000 under a letter of comfort issued by the Minister for Finance.


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## CU Manager (26 Sep 2011)

That article is pure speculation and even admits as much in the body of the article. I agree that the Dept of Finance will want to keep any bail in amount as low as possible - that can be achieved by establishing realistic capital reserve requirements.

You are quite correct regarding the deposit guarantee scheme. Rightly, CU's have not had to pay for it yet as the SPS fund, which was funded by the movement for years has provided the funding needed for distressed CU's. 
A handful of CU's depleted the SPS - it makes you wonder, was the regulator asleep at the wheel for certain CU's as well?

Funding of the scheme will now have to be provided going forward as the SPS is being depleted - nothing wrong with that. I am not sure what point you are trying to make?


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## kaplan (26 Sep 2011)

It's important to understand the difference between voluntary league stabilisation systems which are designed to bail out distressed credit unions and deposit insurance which is designed to (a) ensure people don't rush to take out their money at the first sign of trouble and to (b) compensate them in the event of closure. Credit unions haven't been required to pay for deposit insurance coverage as the issue of appropriate stabilisation has not been dealt with. It's likely the central bank will establish a statutory credit union funded stabilisation mechanism which may incorporate some DGS elements. This would be in line with international precedent where rather than bailing out distressed credit unions, regulators either close them down or order them to merge with others. Stabilisation funding is then used to temporarily fund the merged entities balance sheet.

@CUManager : in your view what would be a realistic level of capital?


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## CU Manager (26 Sep 2011)

we finally agree on something!
By the way, I am not pro ILCU and I can see where improvements need to be made in the movement but I object to the level of negativity you seem to bear for the movement! 
I am a qualified accountant and financial adviser and I object to generalisations about the professionalism and competence of CU Managers!


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## kaplan (26 Sep 2011)

@CUManager: you have noted your objections and attacked the regulator for being lazy and maintain reserve requirements are too high. In your view what would be a realistic level of capital? You might address the question in this thread.


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## CU Manager (26 Sep 2011)

Done. perhaps you might withdraw your generalisations regarding CU Management?


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## kaplan (26 Sep 2011)

Persisting in mixing loan provisioning with capital adequacy concepts is indicative of a threshold competency problem many credit unionists have. 

The regulatory reserve ratio was introduced abruptly to stop credit unions raiding their reserves to pay dividends to savers. The ratio forced credit unions to bolster their regulatory reserves from other reserves. It was a risk induced intervention triggered by credit union governance behaviour. 

Similarly regulatory agreement to modify loans (reschedule them) was also matched with an insistence that proper provisioning applied (which is sound prudential practice) and to prevent credit unions massaging provisions as many have done in the past to pay dividends.   

Despite it being legally permissible Irish credit unions do not use supplementary capital unlike their peers in Canada, Australia where they raise non-voting capital using alternatives that protect their co-operative structure. Using such capital has nothing to do with ethos. 

U.S. credit unions face the same capital constraint though, as they are not permitted to use supplementary capital. They are not arguing for a reduction in capital ratios but looking for permission to raise supplementary non-voting capital that protects their co-operative status.

Why is this important? If Irish credit unions are to function as efficient lenders – something they have underperformed at since the late 1990’s – the will have to raise capital. But this is impossible to do from retained reserves (operating profit) as their operating model – the way things are done – is too expensive and is impacted by impaired assets. There are too many non-viable operations that are either insolvent, trading close to capital impairment or zombified. Funding is required to consolidate numbers down to a viable size (fund post-merger balance sheets to allow for loan losses) and supplementary capital needed so that consolidated credit unions can then function as credit unions should. Kick starting viable credit unions with fresh supplementary capital injected by the state would amount to a bailing in of the sector.


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## CU Manager (26 Sep 2011)

kaplan said:


> Persisting in mixing loan provisioning with capital adequacy concepts is indicative of a threshold competency problem many credit unionists have.


Its fairly simple Kaplan, capital reserves are simply solvency buffers, you only need large ones if you have assets that have inherently volatile valuations. The main risk asset in any CU is its loanbook. A well managed loanbook with sensible provisions reduces the solvency buffer required.
If provisions recognise losses and potential losses on a loan book then, the better such provisions are, the less the need for "what if" solvency buffers 



kaplan said:


> The regulatory reserve ratio was introduced abruptly to stop credit unions raiding their reserves to pay dividends to savers. The ratio forced credit unions to bolster their regulatory reserves from other reserves. It was a risk induced intervention triggered by credit union governance behaviour.
> 
> Similarly regulatory agreement to modify loans (reschedule them) was also matched with an insistence that proper provisioning applied (which is sound prudential practice) and to prevent credit unions massaging provisions as many have done in the past to pay dividends.


Blanket provisions for rescheduled loans are nonsensical. Refinancing a loan is not, of itself, indicative of a members inability to repay. many members reduce their repayments when they have "broken the back" of a large loan so as to reprioiritise household cashflow.



kaplan said:


> Despite it being legally permissible Irish credit unions do not use supplementary capital unlike their peers in Canada, Australia where they raise non-voting capital using alternatives that protect their co-operative structure. Using such capital has nothing to do with ethos.
> 
> U.S. credit unions face the same capital constraint though, as they are not permitted to use supplementary capital. They are not arguing for a reduction in capital ratios but looking for permission to raise supplementary non-voting capital that protects their co-operative status.
> 
> Why is this important? If Irish credit unions are to function as efficient lenders – something they have underperformed at since the late 1990’s – the will have to raise capital. But this is impossible to do from retained reserves (operating profit) as their operating model – the way things are done – is too expensive and is impacted by impaired assets. There are too many non-viable operations that are either insolvent, trading close to capital impairment or zombified. Funding is required to consolidate numbers down to a viable size (fund post-merger balance sheets to allow for loan losses) and supplementary capital needed so that consolidated credit unions can then function as credit unions should. Kick starting viable credit unions with fresh supplementary capital injected by the state would amount to a bailing in of the sector.


Not worth even exploring. The sovereign cant even tap capital markets and all our domestic banks cant either. There is no possibility of such capital being raised now or in the medium term.

The reality is that for well run CU's capital adequacy - benchmarked against international best practice, is not a problem.
The following is typical for a CU
Asset size €50m
Loan book €25m
Attached savings €8m
Prov for bad debts €2m
Cash & investments €24.5m 
Fixed assets €2.5m
Capital Reserves €5.5m

On the face of it, this CU has just 11% reserves. However on a risk weighted basis the CU has capital reserves of 31%!
The risk weighting being:
cash and investments 0% - assumes all investments are capital guaranteed which is the case in nearly all CU's now.
Loans with shares attaching - 0% up to the value of the attached shares
Everything else 100%
€50m-€8m-€24.5m = €17.5m risk weighted. €5.5m/€17.5m = 31%


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## Brendan Burgess (26 Sep 2011)

Folks

Can you all calm down please? It deters others from contributing to the discussions.

We opened this forum on Askaboutmoney to discuss and analyse serious issues. 

By all means, disagree with each other. But...

Avoid personalised attacks

Avoid inflammatory language

Avoid speculating about the identity of posters on askaboutmoney. 

Don't allow other users to provoke you. Ignore OTT attacks. It reflects badly on them, not on you. 

Brendan


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## kaplan (26 Sep 2011)

@CUManager : Which RWA model are you working off? Basle I, II or III? It appears to be very simplistic. To flesh it out you will need to account for operational and market risks as well as investment risk. It’s also likely that undiversified exposure to unsecured personal loans having a sub-prime pathology would attract a weighting higher than 100%. To an outsider an RWA framework seems appealing particularly as it can be played around with to reduce regulatory capital – but it’s a complex framework requiring substantial organisational expertise, dedicated technologies and specialist skills – most if not all of which would not be within the resource capability of credit unions at this time. A well managed loan book with adequate provisions does not reduce regulatory capital requirements unless of course you argue for an IRB or advanced IRB approach.  

In any event RWA is immaterial and mute as the reserving mechanism in use is a leverage ratio which at 10% should ensure credit unions are adequately capitalised. The matter of loan loss provisions is of course an entirely different concept and one that should not be confused with capital adequacy when using a leverage ratio.

Credit unions should hope the Government has pencilled in some money for capitalisation as they won't be able to fund stabilisation costs from their own resources.


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## CU Manager (27 Sep 2011)

@Kaplan: to suggest a weighting above 100% is barmy. You cannot lose more than 100% of an asset. In a CU context you cannot lose more than the loan less attached savings as loan interest income is not booked until physically received. I therefore gave attached savings a 0% weighting.
Investments in my CU (and the majority of CU's) are 100% capital guaranteed via ELG so would attract 0% weighting. Depending on the investment portfolio the weighting ciould change but I would advocate a low rating if the investments are in compliance with the Regulatory Guidance Note

Loan loss provisions over and above what the Board consider necessary are a solvency buffer. Capital reserves are a solvency buffer. Related - yes. Perhaps you have a conceptual problem but anything that provides a solvency buffer is related. Overzealous provisioning reduces capital reserve requirements and vice versa.


You may feel that risk weighting is a mute point. I think that that is a disingenuous position when it is clear (and demonstrated) that CU's capital requirements are highly debatable. I t is easy to create a capital adequacy problem if you engage in lazy regulation and set unnecessarily large solvency buffers on top of overzealous provisioning requirements.
Its absolutely amazing that CU's can survive and thrive for over 50 years, in worse recessions than this one and suddenly, a regulator asleep at the wheel can suddenly wake up and decide "not on my watch, double the provisions, increase the capital reserve requirements". "by how much?" said the registrars staff. "I don't know, think of a number, double it and then add 5%" said Mr Registrar thinking it will be nice to get back to my hammock and relax - this will all be over soon!


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## kaplan (27 Sep 2011)

CUManager’s posts reflect an ambiguity to compliance and belligerent attitude to regulation and supervision which is a documented facet of credit union governance and management behaviour.

Firstly the persistence in conflating the concept of regulatory capital with loan loss provisioning is either because the poster is not familiar with capital allocation models or it is a deliberate distortion in support of a specious argument to reduce capital levels. And one which is being used here and elsewhere by credit union activists to attack the Central Bank’s efforts to protect savers funds and stabilise the sector.

The credit union regulators record in regulating credit unions starkly contrasts with banking regulator’s record relating to banks. Far from being “asleep at the wheel” its attempts to reel in credit union directors and managers risk taking were met with their obfuscation and belligerence. Taking over the regulation of credit unions in 2003 the new credit union regulator inherited a system based on self-regulation and regulatory captivity. Here’s what the regulator had to say in 2008 

_“Many of you will be aware that my office sought for many years, to change what we considered to be an inherently risky and inappropriate investment strategy operated by credit unions. This process of reform proved quite difficult and did not receive adequate support from some groups within the movement. A lengthy and convoluted consultation process delayed the introduction of investment guidelines which were ultimately issued in October 2006. When I used the words “investment strategy” I did so advisedly because what occurred in the area of credit union investments was not a series of random events but arose from movement policy.” _

Despite being hamstrung by legislation written to hog tie prudential regulation to the political process, the regulator has been as effective as it could be. 

Realising their regulator did not have the power to enforce compliance; many credit union boards and managers knowingly and deliberately broke the law. Had the regulator not been stymied by political interference instigated by trade body and activist lobbying, it’s highly likely that investment losses and loan losses would have been contained. 

More recently the regulator captured the essence of what was a systemic problem when he said: 

_"It might be convenient to put the stresses now evident in many credit unions down to the difficult macro-economic environment we are now experiencing and there is much truth in that. However, this is only partly the reason. For those increasing number of credit unions who now find themselves in financial difficulty there is a recurring trend – they have been poorly governed by boards and management and effective oversight by the supervisory committees has been non-existent.

Many of the poor governance practices have come about in part due to the current loose legislative framework in place for the prudential oversight of the sector, but also because of the general poor compliance culture built up in many credit unions over the years.”_

There are many who would defend bad governance and management excusing it using the volunteer argument – but this does not explain why some credit unions are far better governed and managed. Specious argument and negative attitudes to prudential regulation are a manifestation of governance and management failings.


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## CU Manager (28 Sep 2011)

So u agree that your idea of weighting over 100% was just plain wrong?


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## kaplan (28 Sep 2011)

@CUManager: suggest you apply the law of holes: first stop digging and then google Basel 11 

“The standard risk weight categories used under Basel 1 were 0% for government bonds, 20% for exposures to OECD Banks, 50% for first line residential mortgages and 100% weighting on consumer loans and unsecured commercial loans. Basel II introduced a new 150% weighting for borrowers with lower credit ratings.”


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## CU Manager (28 Sep 2011)

Barmy, but from a cu context, we lend to local people in our community.  We dont have credit ratings in ireland and u cant lose more than 100% of an asset. You cant lose on loans with attached savings. You cant lose on sovereign guaranteed investments. The typical cu has 31% risk weighted capital reserve.


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## kaplan (28 Sep 2011)

If some cu activists want to try rewrite Basel I,II and III,and challenge accounting standards fine. But they'll have a hell of a job convincing anyone else to live in cloud cuckoo land with them.


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## CU Manager (28 Sep 2011)

Nobody is challenging accounting standards - are u an accountant? I am. 
Basel principles is exactly what we want. Cloud cuckoo land is where capital reserves are required for risk free assets. You seem to ignore the positives in cu's to further your anti cu agenda


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## kaplan (28 Sep 2011)

There are those of us who can distinguish between why credit unions are systemically important for individuals, households, local communities, wider society, the economy and the future banking system, and the way in which so many credit unions have been and are being so poorly governed and badly managed. If someone is anti poor governance and anti bad management it doesn't mean they are anti-credit union. The problem for credit union activists is they have little or no idea of what fiduciary responsibility is. So when critique is levelled at them for poor governance they can't understand that the critique is not levelled at the credit union but the people who govern and manage them - who are but one of many stakeholders.


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## CU Manager (28 Sep 2011)

If you have a problem with the governance of specific cu's then by all means tell us. But your generalisations are most unhelpful and rightly give rise to a strong suspicion as to your real agenda.
The bitterness of your posts is telling


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## kaplan (29 Sep 2011)

_*“The problem for credit union activists is they have little or no idea of what fiduciary responsibility is. So when critique is leveled at them for poor governance they can't understand that the critique is not leveled at the credit union but the people who govern and manage them - who are but one of many stakeholders.”*_

Attribution of negative motive using ad hominem attacks is a behavioural aspect of credit unionist’s belligerent response to critique. Their tactics include amongst other things; public derision of individuals - including regulators and senior politicians - whose objective critique exposes poor governance and bad management practices; privately seeking to silence and muzzle critique using threats and bully boy tactics; deliberate, knowing and calculated misrepresentation of facts and undermining commercial firms legitimate business interests.     

In recent years, credit unionists have taken to blaming their regulator, Government and the banks for problems manifestly caused by years of poor credit union governance and bad management.  Ticking time bombs, many credit unions had been acutely exposed to financial instability well before 2008 through years of governance and management shortcomings. The impact of the global and domestic crisis merely acted as triggers.    

*Governance and management practices destroyed community capital and rendered many credit unions non-viable entities. There are of course some well governed and managed credit unions – hopefully there are enough to use to consolidate the sector.*

What follows is just some of the publically disclosed information on outcomes, practices and behaviours of many credit union directors and management:  

25% of credit unions did not pay a dividend last year. 200 paid less than 1%. 300 have had their lending restricted. Only forty six of 409 were deemed low risk by the Central Bank. Close to €350m lost in investments that should never have been made. Tens of millions lost in loans to businesses and property developers – loans that should not have been made. Court lists burgeoning with legal enforcement actions to recover irrecoverable loan losses. Attempts to commit to jail “can’t pays”. 

In addressing credit union problems in late 2010 their regulator said:

*"If individual credit unions don’t face up to their current business difficulties they are risking their future and possibly that of the sector overall, given the indistinguishable nature of the credit union brand between credit unions and so the potential for contagion to spread."*

And more recently said: 

*"It might be convenient to put the stresses now evident in many credit unions down to the difficult macro-economic environment we are now experiencing and there is much truth in that. However, this is only partly the reason. 

For those increasing number of credit unions who now find themselves in financial difficulty there is a recurring trend – they have been poorly governed by boards and management and effective oversight by the supervisory committees has been non-existent.*

*Many of the poor governance practices have come about in part due to the current loose legislative framework in place for the prudential oversight of the sector, but also because of the general poor compliance culture built up in many credit unions over the years.”*

Putting meat on the bones of regulatory statements - documented and publicised behaviours and practices evidencing a poor compliance culture and poor governance include: 

Manipulation of bad debt provisions, loan write offs, IT system and loan accounts to bolster profits to pay dividends. Frustration of regulatory attempts to control balance sheet and operational risks. Legal loan and deposit limits designed to control balance sheet risks knowingly and deliberately breached. Investments not valued at market prices. Impaired loans rescheduled, with provisions wiped clean. Top up lending leveraging customers into unaffordable debt. No questions asked first timer down-payment loans made without affordability tests. Directors, managers and their families using credit unions as a private bank. Depositor runs caused by governance problems. Exploitation of free life insurance. Promoting tax avoidance and evasion through Non-Dirt share accounts. Director’s undeclared commercial conflict of interest. High risk investment in direct equities, equity based products, illiquid instruments and perpetual bonds. Auditor firms selling high risk investment products. Non-disclosure of material problems in annual accounts. Scapegoating staff to cover up board negligence. Secured loan collateral not perfected or non-existent. Investment losses not divulged in annual accounts. Non-dividend reserves raided to pay dividends. Systemic under provisioning for impaired loans -loss provisions understated on average by 40%. Supervisors giving a clean bill of health to bad operations in annual accounts and at annual general meetings. Overcharging on payment protection insurance and loan interest. Net worth invested in ostentatious premises. Serious maturity mismatch between investment assets and deposit liabilities. Legislative and regulatory reforms blocked by trade body and activist political lobbying. Rejection of a voluntary consumer protection code.

Since 2003 of the fifty largest credit unions, thirty have experienced significant governance and management problems; some involved serious non-compliance issues requiring regulatory intervention. Five have experienced a local run on deposits. These problems have been extensively reported on in national and local media and are a matter of public knowledge within the sector.


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## Brendan Burgess (29 Sep 2011)

As I said

			 		  		 		 			 			Folks

Can you all calm down please? It deters others from contributing to the discussions.

We opened this forum on Askaboutmoney to discuss and analyse serious issues. 

By all means, disagree with each other. But...

Avoid personalised attacks

Avoid inflammatory language

Avoid speculating about the identity of posters on askaboutmoney. 

Don't allow other users to provoke you. Ignore OTT attacks. It reflects badly on them, not on you. 

Brendan


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## WizardDr (29 Sep 2011)

er is Kaplan a Regulator?


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## kaplan (6 Oct 2011)

*Credit Unions to get between €500m and €1bn*

RTE: credit unions to get left over bank money
http://www.rte.ie/news/2011/1006/creditunion-business.html
The Government will be able to recapitalise the credit unions with funds put aside for the banks that were not fully used.


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## kaplan (7 Oct 2011)

Avoided? The figure would be far higher had credit unions not been prevented from raiding their reserves to fund dividends.


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## kaplan (7 Oct 2011)

*Government set to inject up to €1bn into credit unions*

Minister Michael Noonan has indicated that upwards of €1bn in tax payers funds may be required to capitalise credit unions. [broken link removed]      Irish Examiner

Media predictions of substantial bailout funds being required to stabilise the sector have been correct all along despite persistent denial by ILCU and credit union activists.

How should Government inject money - does this mean it takes an ownership stake or nationalise as it did with the mutual building societies ?


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## kaplan (7 Oct 2011)

No


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## tvman (7 Oct 2011)

News reports suggesting that they won't take an ownership stake and the capital will be repayable. 

It's a bit strange as that sounds more like debt than equity but maybe they mean to use something along the lines of redeemable preference shares (I have no idea if the legal structure of credit unions allows this type of capital)


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## kaplan (7 Oct 2011)

try arguments to reduce the leverage ratio instead. also see other threads for discussion on RWA...which I'm afraid hasn't been well informed by an appreciation of how RWA works. Try not to confuse regulatory capital with accounting asset losses.


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## CU Manager (7 Oct 2011)

@Anyone1: you are on teh right track there. Common sense tells you that the risky assets is just €4.7m against capital reserves of €1.7m = 36% - similar to the figures I have quoted in earlier posts.
Never mind Kaplan, he finds a way to make simple concepts sound complicated - I must look this up on google to see what the psychologists call such behaviour, I'm sure there is a complicated sounding name for it!


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## kaplan (7 Oct 2011)

@anyone Large grain of salt needed as this is from an trade body that denied tax payers funds would ever be needed. ILCU has consistently talked down and at times misrepresented the scale of the problems.


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## kaplan (7 Oct 2011)

@CU Manager and Anyone - suggest you two do up a paper on your proposed RWA approach and submit it to the Central Bank for comment


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## kaplan (7 Oct 2011)

Suggest the Governor


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## Brendan Burgess (7 Oct 2011)

I have merged these two threads.


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## The_Banker (10 Oct 2011)

Good article in The Examiner by Bill Hobbs this morning.
*[broken link removed]*


[broken link removed]


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## kaplan (10 Oct 2011)

Hobbs is also mentioned in this [broken link removed] article. Seems he flagged up problems in early 2007.


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