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



## ajapale (21 Sep 2011)

Bill Hobbs provides some interesting insights into the issues facing Credit Unions in his Blog.

What do AAMers think of his contention that CU's face a round of compulsory consolidation? Slimmed down credit unions should grasp reform opportunities


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## kaplan (22 Sep 2011)

*Central Bank sets up special unit to merge credit unions*



The bank has has recently set up a Special Resolutions Unit within the Credit Institutions Supervision Directorate to manage the mergers.


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## CU Manager (22 Sep 2011)

ajapale said:


> Bill Hobbs provides some interesting insights into the issues facing Credit Unions in his
> What do AAMers think of his contention that CU's face a round of compulsory consolidation?


 
The world and his wife know that compulsory consolidation is the preferred route of the regulator at this point and indeed the Charlie Weston in the Indo reported last week that a special team has been established in the Central Bank to progress the process of consolidation.
The big danger with consolidation is the possibility of losing the ethos of locallly run CU's. This must be balanced against the possible benefits of consolidation but bigger is not always ebst as we have found to our cost with the banks!


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## kaplan (22 Sep 2011)

CU Manager said:


> The big danger with consolidation is the possibility of losing the ethos of locallly run CU's. This must be balanced against the possible benefits of consolidation but bigger is not always ebst as we have found to our cost with the banks!


Not to sure about that - US, Canadian ad Australian credit unions have been consolidating for quite some time. 

U.S.        *2003 = 9369* *2010 = 7491*   a 20% decline    (no. in 1995 c*12,200)
Canada    *2003 = 1298* *2010 = 877*    a 32% decline     (no. in 1995 2,448)
Australia  *2003 = 187* *2010 = 105*    a 44% decline     (no. in 1995 291)

While they have been "consolidating" the numbers of outlets and customers have grown as has the range of products and services.

The equivalent data here is:

Ireland *2003=421* *2010 = 409* a 2.8% decline  (no. in 1995 c421)

* about 35 US credit unions have demutualised. One Aussie CU has converted to a mutual bank.


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## CU Manager (22 Sep 2011)

kaplan said:


> Not to sure about that - US, Canadian ad Australian credit unions have been consolidating for quite some time.
> 
> U.S. *2003 = 9369* *2010 = 7491* a 20% decline (no. in 1995 c*12,200)
> Canada *2003 = 1298* *2010 = 877* a 32% decline (no. in 1995 2,448)
> ...


 
The issue is more of a fundamental issue than statistical analysis!
The issue relates to the power of local communities to maintain their local financial co-operative to be run & managed by local community leaders with a Board of democratically elected directors from their community.
Improvements to the participation of members in the democratic process would be useful though


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## ajapale (22 Sep 2011)

Topic reminder:  CU's are about to have consolidation foisted on them.

aj


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## Brendan Burgess (22 Sep 2011)

This is a very interesting issue. 

At first site, it appears to me that consolidtion and professionalisation is a good idea. But I think that everyone makes an assumption that bigger is better and it's not really teased out properly. 

It seems to me that it is assumed that consolidation is good. However, I would think that it works in some cases and doesn't work in others. 

It does make sense for a well run, well capitalised credit union which is paying a dividend to take over a smaller, poorly run, undercapitalised credit union. They should be able to improve their management. 

If a small credit union which only opens for a few hours a week is well run and well capitalised, I don't see any advantage in merging it.

Nor do I  think that it makes that much sense to merge two medium sized credit unions, both of which are badly run. 

Should two medium sized, well run credit unions merge? If their locations overlap, they can close a few offices and get savings. But will it make their credit decisions any better? I doubt it. 

Is there any systematic study of the benefits of consolidation?


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## Brendan Burgess (22 Sep 2011)

ajapale said:


> Topic reminder:  CU's are about to have consolidation foisted on them.
> 
> aj



aj

You are too polite by far! 

I saw no relevance of the Oldforge story to this very important thread, so I deleted the posts about it.


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## bullworth (22 Sep 2011)

Brendan Burgess said:


> It does make sense for a well run, well capitalised credit union which is paying a dividend to take over a smaller, poorly run, undercapitalised credit union. They should be able to improve their management.



How does it make sense for the members of the well run credit union to subsidize the members of the poorly run credit union thereby affecting their own dividend and ability to give loans in their locality ? It surely wouldn't be in their best interests.


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## kaplan (23 Sep 2011)

@ Brendan: 

What do you do when you have dozens of non-viable credit unions (small, medium and large)

(a) you can liquidate them and use the DGS to make depositors whole or 
(b) merge them with stronger credit unions (NCUA/NCUSIF does this in the US quite often).
(c) Tell a bank to take them over (our bank resolution powers allow for this option)

It seems there are two possible views based on what are mutual but differing objectives:

The objective of "consolidation" from a regulatory perspective is to stabilise the system. A supporting resolution framework could provide for post-merge balance sheet support and or warehousing troubled assets. 

The objective of "mergers" from a credit union perspective should be to realise co-operative scale economies (achieving cost efficiencies) an scope economies (shifting from single product to multi-product production systems)

There are numerous studies of the benefits and drawbacks of credit union mergers available online. Some focus on credit union size - the "is bigger  better" question and find that scale economies are achieved and performance improved. Some focus on the merge or internally grow question finding that internal growth is better. One Canadian study found that large multi-product credit unions were more cost efficient than small single product ones - which has of course policy implications as regulations that inhibit growth are inimical to market efficiency.

The Hobbs article is saying that consolidation should be seen as an opportunity, the credit union "merger" view - rather than a threat, the reaction to a regulatory imposed consolidation programme. This is fleshed out in the [broken link removed], which while one persons' view puts more meat on the bones of what consolidation might achieve.


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## Brendan Burgess (23 Sep 2011)

bullworth said:


> How does it make sense for the members of the well run credit union to subsidize the members of the poorly run credit union thereby affecting their own dividend and ability to give loans in their locality ? It surely wouldn't be in their best interests.



Hi bullworth, while I was writing that post, I had intended to make that point. Thanks for reminding me.

The reality is that it's not in the interests of the members of the larger credit union on  a strictly "selfish" basis, but it's in the public interest that badly run credit unions are taken over instead of letting them go bust. 

I did say "smaller" and meant to clarify that it would not be in the interests of a well run credit union to take over a similar size credit union and put itself at risk.

Brendan


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## Brendan Burgess (23 Sep 2011)

Hi kaplan

Thanks for that. 

It's difficult enough to handle a small number of small credit unions in trouble. The Regulator has his hands full with so many in such difficulty. 

I don't think that consolidation should be an objective in itself. 

The Regulator needs to identify the good CUs and the worst ones and force them to merge on a case by case basis. 

But the egos in the credit union movement are so large that this will be difficult.

brendan


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## kaplan (23 Sep 2011)

Brendan

All [broken link removed] - earlier this year only 46 were said to be low risk by the CB. Three hundred paid less than 1% in dividends last year of which over 80 paid nothing at all. 

Loan loss experience is over 17.5% and still rising. Assets are not being accounted for at market value by many. Viability is an issue for 75% of the sector. 

I agree consolidation shouldn't be an objective of itself in normal times - but it's become the government/regulatory/troika objective given the worsening fragility profile since 2008.  I don't expect credit unionists to do anything other than they've always done and that is to fight to protect their status. (in the land of the blind the one eyed giant is king) 

Their egos may try prevent change but the CB will have the powers to impose change.


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## CU Manager (25 Sep 2011)

@Kaplan - 

Where are you getting your statistics from?
 Please put context on the 17.5% loan loss experience - is this all in 2010 or a cumulative figure over a longer time period?
 How does this statistic compare with AIB, BOI, EBS, PTSB etc?

Assets not being accounted for at market value by many - how many? what assets? Are these CU's breaching accounting principles? 

Are their statutory auditors allowing them to sign off on accounts that dont give a true and fair view? If so, how many have had qualified audit opinions?


[MOD EDIT:Material in breach of Posting Guidelines Removed by moderator.]


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## kaplan (5 Oct 2011)

why are mergers being "forced"?


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## kaplan (5 Oct 2011)

Do you have any evidence to support the easy to regulate reason?


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## CU Manager (5 Oct 2011)

Anyone1 said:


> To force mergers.


 
Anyone, you hit the nail on the head. The obvious, simple answer is often the correct one.


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## kaplan (5 Oct 2011)

what's wrong with mergers?


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## ajapale (5 Oct 2011)

In the free (unregulated) market mergers/acquisitions will take place where there is a clear commercial advantage in doing so. In many cases the merged entity has to very quickly squeeze out costs and create synergies.

In the public sector where there is a current fad for merger there is no clear commercial rationale. I have argued against badly thought out kneejerk mergers in the public service. I just cant believe that one huge disfunctional behemoth such as the HSE is better than a small number of focused mission driven agencies. (but thats another debate!)

In the regulated sector the case can be made for merger for instance are we better with one big bus company or several smaller ones.

In the trade union sector few would argue that the proliferation of tiny unions in the 60's and 70's was a good thing and most involved supported the gradual amalgamatin of several unions into a handfull or large trade unions.

Is a small number of mega schools in a city better than a larger number of focused mission driven smaller schools?

So my comment is as follows: if there is to be radical amalgamation of CU's then it has to be well thought out and implemente with a clearly understood and articulated rational for the merger. This calculation is an easy one in the private sector (what maximised shareholder wealth) but is altogether more complicated when the public interest / service community service is the goal.

aj


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## kaplan (5 Oct 2011)

The careful rationale was articulated in the [broken link removed] document published in Nov 2006. It was also articulated within the ILCU Rationalisation Report 2006 (unpublished). Whereas ILCU at the time allowed for all types of co-operation from marketing groups to amalgamations, CUDA was focussed on the need to rationalise through mergers. The rationale with both looked to build the competencies needed to realise credit union scope and scale economies. See Canadian current experience [broken link removed]
Consolidation is a typical feature of credit union systems which has been delayed here for various reasons. There are a number of studies that have shown that larger credit unions are more efficient and offer better quality products and services. None have established if their social purpose has been undermined.


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## CU Manager (5 Oct 2011)

The simple fact is that consolidation will result in centralisation of key decisions including, crucially, lending decisions.
A huge part of the credit union difference in Ireland is our local knowledge of our members. This allows us to make better lending decisions making loan facilities available to people who might not fit neatly into the faceless underwriting criteria of large organisations.
Such a reality doesnt fit in neatly with the perception of anti credit union banking commentators


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## kaplan (6 Oct 2011)

Consolidation would allow for better standards in credit union credit risk management and lending practices which have been a matter of some concern for some time: 

_The relaxation, in recent years, of the lending terms operated by credit unions has increased the risk profile of the loan portfolio of the movement. It is not so long ago that credit unions made loans on much stricter terms than is currently the case. Loans were limited to a low multiple of the existing savings and income of the member. Business lending, such as is sometimes seen today involving loans over six figures, was unknown. Loans for speculative property developments were equally unusual.The substantial inflow of liquidity to credit unions together with certain ill conceived strategies within the movement have increased the pressure for credit unions to move into the mainstream lending market, in competition with the banks. This has sometimes been done without due regard to the borrower’s ability to repay, in the absence of any credible credit check or without the taking of viable security. Credit unions should now critically re-examine their credit policies in the light of the changing external environment.

It may be the case that with margins in credit unions declining, that pressure may be felt by boards to maintain the dividend level of the credit union over and above that which would be fully justified by the underlying financial results of the year in question. Such pressure may result in a temptation to *artificially increase the credit union’s surplus*, by a variety of means. The understatement of the provision for bad and doubtful debts is a feature of this tendency which we have commonly detected in our inspections. *Various unacceptable devices to achieve this have been uncovered by our inspection teams. These include inappropriate rescheduling of overdue loans, the issuance of top-up loans in arrears situations or the exclusion from the provision calculation of overdue loans where security is held.* Supervisors should be alert to such practices and it should always be borne in mind that the board has a statutory obligation to show a true and fair view of the financial affairs of the credit union and to account for the savings of their members. The interests of the credit union are not served by any fudging of hard issues facing it in respect of bad debts or any other issue._ Address by Registrar of Credit Unions to National Supervisors Forum Annual General Meeting - *3 November 2007 *


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## CU Manager (6 Oct 2011)

If the Registrar finds unacceptable practices (presumably in a small number of CU's) he should get rid of the offending party - be that Board or management. He aparently has the powers at his disposal. Problem solved. The rest of us, in well run and managed CU's can get on with the job!
You seem to have a knack for making straightforward issues sound complicated! Stop thinking bank and start thinking credit union and you will get it eventually - don't give up!


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