# How safe are the Credit Unions?



## NavanMan1 (21 Sep 2007)

*Just how safe are Credit Unions ?*

In this current uncertain climate, what do people think regarding the safety of Credit Unions ?   I remember reading somewhere that Credit Unions take out some form of insurance with the ILCU to protect members shares (deposits), but is it 100% guaranteed or is there a limit set ?

Either way, am off to mine to withdraw 7K and go across the road to the Post Office to open a State Guaranteed Deposit account at 3%.

Maybe safe enough to leave 3K in the CU, I hope………


----------



## Happy Girl (21 Sep 2007)

*Re: Just how safe are Credit Unions ???*

NavanMan1 I am in exactly the same Credit Union as you (with PO directly across the road - location given away by your name of course) and if I recall correctly we received a miserable 2.9% interest last year on our accounts. My understanding was that credit unions are the safest options at present given that they are not involved in the whole mortgage scenario, sub prime, etc, etc. Can anybody confirm or negate this for me.


----------



## Jethro Tull (21 Sep 2007)

*Re: Just how safe are Credit Unions ???*

only have a nominal sum in my credit union account in order to keep it open but was wondeing about this sort of thing myself.


----------



## gipimann (21 Sep 2007)

*Re: Just how safe are Credit Unions ???*

Here's the info from the ILCU website about the savings protection scheme.

"The Savings Protection Scheme protects the individual savings of members by making sure that the credit unions are financially and administratively sound and by providing remedial help to any credit union which shows signs of weakness in these areas.  Participation in the Savings Protection Scheme does not confer any legal right on a credit union to receive any financial assistance under the Scheme.  Provided assistance is given under the Scheme the savings of individual credit union members may be protected up to a maximum of €12,700."


----------



## whizzbang (21 Sep 2007)

*Re: Just how safe are Credit Unions ???*



Happy Girl said:


> NavanMan1 I am in exactly the same Credit Union as you (with PO directly across the road - location given away by your name of course) and if I recall correctly we received a miserable 2.9% interest last year on our accounts. My understanding was that credit unions are the safest options at present given that they are not involved in the whole mortgage scenario, sub prime, etc, etc. Can anybody confirm or negate this for me.



I thought a lot of people were using credit unions to hide debts in so the banks could not see them, thus giving them higher loan approval. This might suggest they are tangentially involved and may suffer from bad debts.


----------



## Jethro Tull (21 Sep 2007)

*Re: Just how safe are Credit Unions ???*



whizzbang said:


> I thought a lot of people were using credit unions to hide debts in so the banks could not see them, thus giving them higher loan approval. This might suggest they are tangentially involved and may suffer from bad debts.


 
you also have the fact that so many people I know have borrowed a couple of grand from a credit union with very few (if any) questions asked. Hardly the most secure lending!


----------



## oldtimer (21 Sep 2007)

*Re: Just how safe are Credit Unions ???*

Credit unions offer less protection than banks, a fact that is little known and not publicised. By the way I am confused by Navanman. What kind of deposit account does the Post-office offer with 3%? I thought they had just 2 kinds of deposit accounts i.e. the ordinary post-office account which offers 1% on demand or Postbank which offers 3.3% on demand. Remember both these accounts are liable for DIRT, unlike their DIRT free long term saving schemes.


----------



## Brendan Burgess (22 Sep 2007)

*Re: Just how safe are Credit Unions ???*

The Savings Protection Scheme run by the credit unions is not a deposit protection scheme.  It is more a fund which is available to the Irish League of Credit Unions which they  may or may not use to help out a credit union in difficulty. It is a bit like the Bank of England bailing out Northern Rock by giving them cash to keep going. When a credit union experiences difficulty, the ILCU usually gives them enough cash to meet their needs. I think this happened in the case of Monaghan Credit Union last year. 

The ILCU is under no obligation to step in. 

The finances of the SPS are mixed up in the finances of the ILCU itself. So they were at risk some years ago when the ILCU spent millions on a computer system which did not work.

One scheme covers CUs in the Republic and in the North. 

The Financial Regulator wants a separate independent deposit guarantee scheme but the Department of Finance backs up the League in having a revised version of the Savings Protection Scheme. 

How safe are the credit unions? Very difficult to answer. All the credit unions are separate. They are generally run by volunteers and most are well run.They want to move to long term lending and commercial lending, but the Financial Regulator is worried about this. 

Some individual credit unions are badly run. They are making bad loans. It would not surprise me if one or two got into financial difficulty. If the smaller ones get into trouble, the SPS will sort it out. If a few big credit unions get into difficulty, the SPS will be depleted. 

Their main problem is that they are no longer competitive for loans or deposits. They are quickly losing market share. At some stage in the future, individual ones will no longer be viable. Hopefully, the Financial Regulator will step in early enough to direct them to wind down in an orderly manner before they become loss making.


----------



## Bluebells (23 Sep 2007)

*Re: Just how safe are Credit Unions ???*



gipimann said:


> Here's the info from the ILCU website about the savings protection scheme.
> 
> "The Savings Protection Scheme protects the individual savings of members by making sure that the credit unions are financially and administratively sound and by providing remedial help to any credit union which shows signs of weakness in these areas.  Participation in the Savings Protection Scheme does not confer any legal right on a credit union to receive any financial assistance under the Scheme.  Provided assistance is given under the Scheme the savings of individual credit union members may be protected up to a maximum of €12,700."



On my CU statements, I have 0 in ' Savings ' a/c, and xxxx in ' Shares ' a/c.
I'm wondering if that money is not protected under the SPS. To me all the money there is ' savings ', regardless of what the a/c is called by the CU.


----------



## so-crates (23 Sep 2007)

*Re: Just how safe are Credit Unions ???*

Insofar as I understand (see the [broken link removed]website for more info) there are two main categories of "savings" in Credit Unions. The first and most common one is the share account which is the one you open first, you need to request specifically to open a deposit account. Share accounts attract a dividend, determined annually, and give you voting rights and are used as security for loans from the credit union. The deposit account attracts an interest rate (pretty low think it is about 1% at my local CU) and is not usually used as security for loans - at least when I was enquiring at my CU about it that is what I was told.


----------



## kaplan (24 Sep 2007)

*Re: Just how safe are Credit Unions ?*

Joe O Toole announced this week that he is to re-introduce his Bill for a statutory savings protection scheme (deposit insurance). He sparked an angry reaction from the ILCU who accused him of scaremongering. Seems a case of protesting too much. The fact is not one Euro of credit unions savings is guaranteed depite bank savings being guaranted since 1995. The law requires a credit union to participate in an approved regulated deposit insurance scheme since 1997 and yet nothing has been done by Government to set up a scheme. 

Funny thing is I recall that the April 2006 run on Monaghan Credit Union started following media stories that the ILCU savings protection scheme support failed “to do what it said on the tin”. 

It took the public assurances of the Financial Regulator before the run abated. This mini-Northern Rock it seems had come close to a contagious run from all accounts. 

It’s quite a strange thing to consider but it would appear that the ILCU acts as a quasi lender of last resort which is quite unusual it seems in a modern system of financial regulation, supervision and deposit insurance. 

No where else will you find a trade body being permitted to provide deposit insurance. This lies at the heart of the debate on what is called the credit union financial safety net which in Ireland is wholly inadequate. 

Niall Brady writes of credit union savings protection in today’s Sunday Times and highlights the discretionary nature of assistance to a credit union and the possibility of compensation of only €12,700. He also highlights that some of the largest credit unions are not members of the ILCU. There are about 435 credit unions of which the top 50 control c54% of total assets with the top 20 c30%. The ILCU fund would be exhausted within days of a run on any one or more of the larger credit unions. That's if it's board decided to provide assistance. Serious concerns have arisen around the operations of this scheme where millions were "borrowed" to finance a failed IT project, The ILCU headquarters building and credit union buildinng programmes. 

He quotes Liam O’Dywer, CEO ILCU as saying that stabilisation (what credit union call assistance) is a “health service” whereas deposit insurance is a “death service”. This is an interesting use of words as it seems to indicate the overriding concern of the ILCU is to bail out a credit union no matter how much trouble it's in. This body is a trade association for credit unions. It seems to me that his words reflect an inherent conflict of interest. If you look at the ILCU operations you'll see a number of business operations that propose a unhealthy degree of systemic risk. For example the ILCU underwrites billions in life coverage for its members, co-manages €3bn+ of their excess funds, and generates the vast bulk of its funding from commercial business operations. 

As far as its supervision of its members compliance with safety and soundness standards is concerned: the Financial Regulator in its recent annual report which says:“During 2006 considerable progress was made in developing the system for the regulation of credit unions with a view to *building compliance*.”. The implication is that self-regulation and supervision did not build compliance and state supervision has still some way to go. This is testament to the current state of effective supervision and it’s not good. 

O’Dwyer conveniently ignores the point that, internationally, deposit insurance schemes also include assistance to troubled but viable credit unions along with deposit guarantees. Of course they are established as government agencies and work closely with the regulatory and supervisory agencies. Stabilisation schemes, such as the ILCU provides, disappeared elsewhere years ago. They were seen to be too risky by credit unions and their trade bodies who lobbied for state deposit insurance.

The bottom line is this: if a credit union failed which would you prefer (a) a wooly promise from a trade body that they just might pay you back your savings or (b) a statutory guarantee that you will be paid. But right now all you get is a promise depending on which credit union you save with.


----------



## Brendan Burgess (24 Sep 2007)

*Re: Just how safe are Credit Unions ?*

Liam O'Dowyer said that 5 Credit Unions were supported by the Stabililzation Fund over the past 20 years. 

By the way, no credit union in Ireland has ever gone bust. Of course, this may change.

At the moment, the Credit Unions have the opposite problem to Northern Rock. They have only loaned out 50% of the money they have on deposit. 

Brendan


----------



## kaplan (24 Sep 2007)

*Re: Just how safe are Credit Unions ?*

The underlying reasons for Monaghan’s problems differed from NR but there are similarities. The first is a bad news story was reported on in the media. The second was a failure of the support systems to work in time. The third was it took the public assurance of a regulator to stave off the run. 

Monaghan’s problems lay with sheer size of its bad debt provisions. It’s well known that loan delinquency levels have sky rocketed in credit unions in the past few years. Media reports last year spoke of over 4 out of 5 credit unions reporting levels well in excess of the Leagues own internal standards. This is worrying as bad debts have to be written off sometime…you can’t keep rolling them over. Hidden within the loan book is a hard core of bad loans that will have to be written off. This will impact both on earnings, the ability to pay a dividend and retain reserves. 

Solvency is also an issue of concern as over all levels of reserves have been declining since 2000 although they marginally improved in 2006 due to a new accounting treatment of dividend payments. 

While it is true that lending is about 48% of total assets, this of itself means that credit unions have become very reliant on investment income generated off surplus funds. Consequently liquidity is also a problem as many credit unions have put their money out too long. Some in quite risky illiquid investments. 

How safe are credit unions ? Well it seems that some are safer than others. But in the absence of meaningful information you can't tell the wheat from the chaff. In the event of a run it dosen't matter how safe they are - as the Rhode Island credit union crisis in 1991 showed where even the safest closed their doors never to open again. Over half of all households had savings with Rhode Island credit unions.

In a report on the Rhode Island crisis which arose from the collapse of a private deposit protection fund called RISDIC is was said: “Collectively and individually, RISDIC staff and directors lacked insurance experience, had little banking experience outside of the small world of Rhode Island state-chartered financial institutions, and possessed modest educational and professional credentials. Nevertheless, they were well compensated and had great confidence in each other's talents and integrity. RISDIC directors seemed generally oblivious to the complex risks for which they were responsible. Examination findings and problems noted at member institutions were filtered out or excused as they were communicated upward within RISDIC. The result was an uninformed board. (Gregorian [1991])”

Well informed artice here on Irish Credit Unions : [broken link removed]

Ordinary people cannot be expected to analyse financial accounts and judge safety and soundness of deposit taking institutions. This is where the financial safety net comes in. It’s designed to provide public assurance through robust regulations, effective supervision, transparency and deposit insurance. This is why almost everywhere else credit union regulation, supervision and deposit insurance is carried out by Government agencies. 

*Californians know there will be an earthquake, the just can't tell when. The same is true of credit unions. *


----------



## oldtimer (24 Sep 2007)

*Re: Just how safe are Credit Unions ?*

Very good articles by Brendan and Kaplan. Certainly raise cause for concern. However, re the article referred to by Kaplan in business post, it was written in 2004 and in fairness is outdated. As far as I know many of the better run credit unions have addressed many of these issues.


----------



## kaplan (25 Sep 2007)

*Re: Just how safe are Credit Unions ?*

Oldtimer

The better run credit unions have addressed the issues within their control and were at the time the article was written. But these are in the minority. 

I linked the article to demonstrate that in the past 3 years things have not really changed that much. More recent media reports have highlighted worsening bad debts, continuing decline in the loan to asset ratios, investment losses and concerns over risky business lending activities. [broken link removed]


----------



## kaplan (26 Sep 2007)

*Re: Just how safe are Credit Unions ?*

The credit union savings protection Bill can be found here:[broken link removed]


----------



## Guest127 (26 Sep 2007)

*Re: Just how safe are Credit Unions ?*

anyone know what the position is regarding the credit unions who have 'withdrawn  ' from the ILCU. are they still credit unions? what kind of security is in place for depositors of these institutions and who governs them.  Who regulates them? I am a member of Dundalk credit union and I read in the Sunday Times that they one of 15 who have withdrawn from the league. Should I not have been informed of this at the time?


----------



## oldtimer (26 Sep 2007)

*Re: Just how safe are Credit Unions ?*

They are probably members of Cuda - Credit Union Development Association. I think a brother of Eddie Hobbs was its chief. They produced a forward thinking document in 2006 which is available on their website. Don't know what cover they give in the event of going bust.


----------



## kaplan (26 Sep 2007)

*Re: Just how safe are Credit Unions ?*

Credit Unions are registered to carry on the business of a credit union by the Registrar of Credit Unions a statutory function of the Financial Regulator whose powers are derived under the Credit Union Act 1997. Membership of a trade body (ILCU or CUDA) is not a condition of registration. 

If your query in “what type of security is in place” means what type of guarantee is in place then the answer is there is none at this time. Credit unions savings do not enjoy the security of a deposit insurance scheme including a deposit guarantee in the event of the failure of a credit union. 

Credit unions are governed by a board of directors who are elected from their membership at an AGM. They must be members (savers) of the credit union. There is at this time no fitness and probity test required of directors by regulatory authorities Such tests are required of directors and senior management of other regulated credit institutions.

Your questions relating to your credit union are best directed to them. I do note from their website http://www.dundalkcu.ie/savings.htm that it mentions a “savings protection scheme benefit of up to €8000 per member” This is more than likely a reference to its free life cover insurance rather than an approved scheme under the Act (as none exists). As a member you might wish to draw their attention to this. 

More generally the way in which savings protection has been portrayed by both the ILCU and credit unions until recently was tantamount to misrepresentation. Its scheme never provided direct protection for savers as defined under law. All it ever amounted to is a woolly promise that it might pay out up to €12,700.  This is why it hasn’t been approved by the Financial Regulator and why it was considered too deficient by HM Treasury who have not allowed credit unions in the North to provide Child Trust accounts.  However here are some examples of how credit unions portray this scheme: 

*Derry* http://www.derrycu.com/content.asp?section=17 from stating “Your savings are guaranteed under the Savings Protection Scheme of the Irish League of Credit Unions” 
*Thurles* http://www.thurlescu.ie/content.asp?section=17 “Your savings are protected in your credit union under the savings Protection Scheme of the Irish League of Credit Unions”.  
*Waterford** CU* http://www.waterfordcu.ie/ A savings protection scheme is in place to the benefit of the member up to euro 12,700
*Newbridge C**U  http://www.newbridgecu.ie/content.asp?section=88 *Savings Protection Scheme benefit of up to €12,700 per member 
*Dundrum CU*: http://www.dundrumcu.ie/content.asp All of the savings of Credit Union members are *fully insured* and secure. Dundrum Credit Union operates a Savings Protection Scheme which protects members’ shares. Dundrum Credit Union also operates Life Savings Insurance….


----------



## ontour (26 Sep 2007)

*Re: Just how safe are Credit Unions ?*

The analogy of BoE bailing out NR is not the same as the purpose of the savings protection scheme.  AFAIK, BoE is assisting is a cash flow situation by loaning NR the money.  The SPS is closer to an insurance payout than the loan provided to NR.

What is key to understand is that each individual credit union is setting it's own credit policy and it is not valid to make a generalisation as to the risk of credit unions.  All credit unions in Ireland would not subscribe to SPS, so just because credit union is in the name does not mean that the same safety nets exist.   If you are a member of a credit union, read the annual report and see how your credit union is performing as IMHO serious risk issues are unlikely to occur in credit unions in the short timeframe that the NR issues evolved


----------



## kaplan (26 Sep 2007)

*Re: Just how safe are Credit Unions ?*

Ontour
The ILCU SPS is a stabilisation fund that may be used to provide either solvency or liquidity supports to credit unions. In the Monaghan CU case this appears to have been by way of guarantee rather than direct cash supports. (as reflected in SPS note in ILCU financial statements 2006 page 116 Note 15 [broken link removed] )

This is analagous to a lender of last resort function with its emergency liquidity support. I agree though it is not quite the same thing.

There is no notion of an insurance type payout within the ILCU SPS for savers. It is merely a text that appears to say that in certain circumstances and at the discretion of the board a payment may be made to savers. 

Deposit Insurance (insurance is a bit of a misnomer) is quite different as it guarantees compensation to savers in the event of a failure. If you like consumer protection. Modern DI schemes also provide assistance to troubled but viable credit unions where a workout is possible called risk minimisation : here the focus is still on the consumer (saver) where sometimes it is better to provide assistance to a troubled credit union rather than compensate savers if it were to fail. 

At a macro level it entirely correct to generalise as the financial safety net is designed to ensure the financial stability and safety of savings for the sector. 

One of its underlying assumptions is the ordinary saver cannot judge safety and soundness and relies on the safety net to provide assurances that all is well. 

Of course at credit union level, people should not only read the annual reports but also attend the agm and question the board. But on average c5% actually attend CU agm's and fewer still read the report. Even then they have no benchmark to judge their CU performance against. This is one of the reasons why the credit union financial safety net has to be designed carefully and more importantly all its agencies (regulator, superviser and deposit insurer) must be statutory government agencies.

The quote below highlights quality and the usability of accounts:
“This research, while recognised as being exploratory, suggests that the financial statements of many credit unions in both parts of Ireland contain incomplete and inadequate information. Such a situation may undermine the ability of users, and in particular members, to make appropriate judgements and decisions.” THE FINANCIAL ACCOUNTABILITY OF IRISH CREDIT UNIONS: AN INITIAL EMPIRICAL STUDY NOEL HYNDMAN, DONAL MCKILLOP, CHARLES FERGUSON AND TONY WALL* Financial Accountability &Management, 20(3), August 2004, 0267-4424


----------



## ontour (27 Sep 2007)

*Re: Just how safe are Credit Unions ?*

Stand corrected on use of SPS.  In Monaghan's cased it may be liquidity support however I thought that in the cases where credit unions had been defrauded, as in the case in Cork, SPS had stepped in to ensure that the members did not incurr that loss.  I may be mistaken but I took these to be payments from SPS rather than loans.

The financial stability of the sector is not covered by SPS as it is based on membership of the ILCU rather than a regulatory requirement.  I believe that this safety net for the sector is something that the regulator has/is/ will address.


----------



## kaplan (5 Oct 2007)

How safe is your credit union ? How safe are credit unions ? 
Well we don't know cos' some are safer then others and we can't tell one from another. We do know that savings are not guaranteed....yet government has a blindspot ! 

Very interesting blog here [broken link removed]


----------



## oldtimer (6 Oct 2007)

Kaplan,

You appear to have extensive knowledge of Credit Unions. Your comments are of the 'how safe are the Credit Unions' theme. Are you, or have you been, involved with the Credit Union organisation?


----------



## ajapale (6 Oct 2007)

oldtimer said:


> Kaplan,
> 
> You appear to have extensive knowledge of Credit Unions. Your comments are of the 'how safe are the Credit Unions' theme. Are you, or have you been, involved with the Credit Union organisation?



Oldtimer,

Please leave the moderation to the moderators.

All we ask here on AAM is that posters abide by the posting guidelines. 

If you have a problem with a particular post please use the "report post" facility.

Thanks,
aj (moderator)


----------



## kaplan (7 Oct 2007)

*Credit Union financial stability exposed by the Northern Rock crisis. *

News today that credit unions had over €100m on deposit with Northern Rock throws into stark reality the total absence of any statutory supports for credit unions in times of crisis. http://www.sbpost.ie/post/pages/p/story.aspx-qqqt=MARKETS-qqqm=nav-qqqid=27170-qqqx=1.asp

Firstly the conservative estimate is quite low. Tralee Credit Union’s exposure indicates, if other credit unions had similar exposures, the total is somewhere between €100m and €700m. It is fair to say the figure is well in excess of €100m. Just how much remains on deposit is unknown. 

The ILCU points to €100m being a small amount when compared to total invested assets of €7bn but this is a deflection that all too conveniently misses the point. It is the exposure to credit union reserves which is the issue and the impact NR could have had on people who save with credit unions.

There is of course nothing improper with these credit union deposits as NR qualified under the Financial Regulator’s “Investment Guidelines” at the time. This isn’t the issue although questions do arise as the level of overall counterparty risk and limits. 

The real issue is what could have happened. Once again the serious fault lines in the safety net provisions underpinning the financial stability of the credit union sector were highlighted. Consider these two risk scenarios:

(1) *Contamination*: *Risk of a parallel run on credit unions*
What would have been credit union savers’ reaction if they had found out that credit unions had over €100m on deposit with Northern Rock during the crisis days ? It is reasonable to presume that they may have started to withdraw money from their credit unions. If this had happened there was nothing in place to deal with it. No lines of liquidity, no state supports just the ILCU SPS which is a private controversial under-funded scheme of only €100m. It has no mechanisms in place to deal with a run on credit unions. 

(2) *Impaired liquidity and solvency* 
What would have been the situation had the UK authorities allowed NR to close. Credit union liquidity would have been immediately tied up and reserves exposed to loss. Again this is a high risk scenario which could have triggered a credit union run.

Of course none of these scenarios happened. However when considering financial stability and its supporting financial safety net such risks are provided for. But they are not under the current financial safety net provisions the government has in place for the credit union sector. Just how concerned and worried were government and regulatory officials during the NR crisis ? If they had been aware of the scale of credit union exposure perhaps they didn’t sleep too well. 

The fact is there are no state provisions or mechanisms in place to deal with a credit union run….This state and its credit union savers are unduly exposed to risks as government has failed to act since 1997. 

The irony is that the UK government provided a guarantee to Irish credit unions for their retail deposits of upwards of e€700m whereas the Irish government has no guarantee in place for the millions of people who save with credit unions. 

*Following Northern Rock, it is downright imprudent and dangerous for government to delay any longer in providing for a statutory deposit/savings guarantee scheme for credit unions.*

*Kaplan*
informative blog here [broken link removed]


----------

