# Existential Threats to Credit Unions



## WizardDr (18 Oct 2020)

Central Bank of Ireland Regulations for Credit Unions are like quick drying cement whilst delivering, it creates the impression of constructive action called 'structures' 'accountability' 'risk & compliance'  but when it sets and is evidently wrong the structure remains in place though it makes delivery of the original stated project - to strengthen and sustain the 'sector' -much more difficult.

First the CBI cannot ever admit it is wrong which makes the removal of cement much more difficult. Second it either creates a deliberate or  unintended blockage on changes that make sense. Worst of all there is difficulty challenging the Central Bank, It is easy to find breaches of blanket regulations when they cover so many areas. So a Credit Union wont challenge the Central Bank unless in a pack.  The problem is that the representative bodies provide some shared processing services and there is a race on to dominate the mortgage agenda and having processes like,mortgage origination and mortgage servicing outsourced. This to me will mean the local Credit Union does not take an active art in putting the mortgage together - this raises a question on the fundamental relationship with the Credit Union. Some feel that Credit Unions cannot manage mortgages.  FACT: 83 provided mortgages of some sort on which modified TRS was claimed y/e 31/12/2015.

The 10% Reserve Ratio is fake because the equivalent ratio is 3% for Banks.  Do not take my word for it.  Do the calculation of what the ratio is for 'Total Assets' as opposed to 'Risk Weighted Assets.' Banks would not pass the Reserve Ratio test anywhere. Then ask your selves what figure is 'right'.

If the Credit Union attracts too many share or deposit balances the equivalent funds are an asset. No matter what asset they have they must still have 10% reserve ratio. This is a block to growing shares or deposits as any expansion in the assets will see the ceiling being reached and its almost like the end of the world  when in fact a ratio of 4% would have saved Bank of Ireland. Of course 10% is better than 4,5,6,7,8, or 9%.  In fact it is 250% better with less complex assets. The arrival of Covid-19 has seen consumers increasing savings and there was immediate pressure on credit unions and  they virtually all restricted or had already restricted the level of savings despite being the most trusted brand - that it might be but in the mind of Central Bank. This is nonsense. And the damage the ratio will cause is severe.  You cannot grow your loans unless you substitute existing assets -so growing the lending book is required.

The only way to increase the reserves now is by profits. The sneaky Central Bank removed the possibility of the Credit Union issuing debentures (a charge on fixed assets) which not a single Credit Union issued - and this type of capital could have been used by Members who were prepared to have risk capital - because the Central Bank for its own purposes has treated shares as deposits for all intents and purposes.

The only real asset that members might be interested in is a Buy to Let as an augment to their Pension. This type of lending was blocked. It is now regarded as too risky and beyond a Credit Union's ability - it was simply killed off before it began. There are issues with Buy to Lets - high tax bills and a more friendly basis for S110 firms where there seems to be a much lighter regulatory regime. Is this type of lending complex if LTV is set and an income test completed? Why is there no effective lobbying by representative bodies on this?

The expected wipe out of €500m in losses didn't arrive at Department of Finance door despite the proclamation by the Central Bank that disaster was around the corner. But the Central Bank has not been challenged on _how or who _produced the case for toughening up on the Credit Unions. To use the Revenue language it was _bogus._

There is also a restriction on home loan lending regardless of the LTV and all that.  The limits are too low and they reflect paranoia or deliberate ignorance at just how good the shared services such as IT and Payments have been.  Credit Unions formed PAYAC - why was this needed if you had two representative bodies?

Lending demand is now collapsing. Investment returns are closing in on zero. Yet the State does not make it easy - why have the Credit Unions not got direct access to NTMA to place surplus funds?

Therefore we are at a fundamental fork in the road. Low returns on investments. Caps on Savings; Lending demand stalling. A non responsive representative structure and a Regulator that has overcooked the goose.


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## Pinoy adventure (18 Oct 2020)

You cannot grow your loans if the loan book is closed.every week I go into my credit union too deposit money and every week I see there posters "our loan book is open" the big 5 loans,20k/40k/60k home improvement loans etc 
Yet the refused me a loan because they don't do mortagages.
I was only looking for >€25,000.

I would still rather borrow money than take out my savings in the CU but Brendan got me thinking about there practices on there loans.


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## WizardDr (18 Oct 2020)

@Pinoy adventure
Credit Unions are able to do mortgages, your particular one might not. Which one?
You may qualify to be a member of another credit union through having a 'common bond' connection such as where you used to live; work; partner; or where you live.

Some of the bigger ones like Health Services have a full range of products including mortgage.

Wb


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## Protocol (18 Oct 2020)

Every week my local newspaper has ads from several CU, with loan rates at typically 6.9% +.

If PCP rates are from 0%, why aren't the CU competing?

Even 4.9% would be good.

They earn a negative return on corporate deposits with banks, and maybe 0%-1% by buying Govt bonds.

Why not compete against PCP, and earn maybe up to 5%, albeit with default risk.


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## WizardDr (18 Oct 2020)

*Comparing a PCP with a personal loan*
The main difference between a PCP and a personal loan is that with a personal loan you borrow the money, pay for your car, and own it immediately. With a PCP you don’t own the car: you are essentially hiring it for an agreed period of time, typically three years. You only own it if you pay the GMFV (Guaranteed minimum future value.)This is important because if you run into financial difficulty during your agreement you wouldn’t be able to sell the car unless you had permission from the finance company – as they are the legal owner of the car.

Personal Contract Purchase (*PCP*) – can be *good* if you want to get a new car every few years, otherwise a hefty final payment and often more expensive overall than a loan. A popular way to get a new car, especially if you frequently change car and want to pay for it monthly.

I do not think the Credit Unions explain this properly.


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## 24601 (19 Oct 2020)

WizardDr said:


> Central Bank of Ireland Regulations for Credit Unions are like quick drying cement whilst delivering, it creates the impression of constructive action called 'structures' 'accountability' 'risk & compliance'  but when it sets and is evidently wrong the structure remains in place though it makes delivery of the original stated project - to strengthen and sustain the 'sector' -much more difficult.
> 
> First the CBI cannot ever admit it is wrong which makes the removal of cement much more difficult. Second it either creates a deliberate or  unintended blockage on changes that make sense. Worst of all there is difficulty challenging the Central Bank, It is easy to find breaches of blanket regulations when they cover so many areas. So a Credit Union wont challenge the Central Bank unless in a pack.  The problem is that the representative bodies provide some shared processing services and there is a race on to dominate the mortgage agenda and having processes like,mortgage origination and mortgage servicing outsourced. This to me will mean the local Credit Union does not take an active art in putting the mortgage together - this raises a question on the fundamental relationship with the Credit Union. Some feel that Credit Unions cannot manage mortgages.  FACT: 83 provided mortgages of some sort on which modified TRS was claimed y/e 31/12/2015.
> 
> ...



Ah the old, "the Central Bank is to blame for all our woes" chestnut. The Registry of Credit Unions is, by many measures, a poor enough regulator but the majority of issues in the sector are a direct result of poor governance and strategy on the part of credit unions over a long period of time.

The key issue for the sector is that it can't lend out enough of the money it takes in - that's it! This isn't the Central Bank's fault. The Central Bank isn't to blame for the sector having a 25% to 30% loans to asset ratio, credit unions are. That failing is what has exposed the sector to interest rate risk and it has been a problem for many years. Indeed, the last time the sector had a "healthy" loans to asset ratio relative to what it is today was because it was fueling the Celtic Tiger credit bubble.

The reserve ratio is somewhat of a red herring. Indeed, most credit unions were operating with a buffer of 5 or 6% going into this crisis, so the retention of surpluses hasn't been a problem in recent years - indeed most boards have embraced it and recognize capital adequacy as their biggest strength. Also, 10% is the minimum requirement, but no credit union has been liquidated unless they have fallen way below this requirement. These credit unions have generally been in receipt of SPS funding too, so they were already failed or on the way to failure anyway.

There also appears to be a distinct lack of appreciation of the risks associated with such small institutions getting involved in mortgage lending, with very little consideration given to loan book concentration and the economies of scale needed to operate in this market. With around 19bn in assets, the sector is about the same size as PTSB. However, unlike PTSB, this asset base is split 245 different ways. Your average credit union has €77.5m in assets. How much scope does an institution of this size really have for mortgage lending that is on-balance sheet?

Your observation in relation to buy-to-lets further betrays a serious misunderstanding of credit risk. Credit unions shouldn't be involved in BTLs. There are plenty examples of credit unions that did BTLs during the Celtic Tiger years and the results were not pretty.

Also, it's absolute nonsense to be comparing capital requirements for banks with credit unions but I'm not sure that's even worth getting into when the basic premise of the OP is that the CBI is the big bad wolf.


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## NoRegretsCoyote (19 Oct 2020)

24601 said:


> There also appears to be a distinct lack of appreciation of the risks associated with such small institutions getting involved in mortgage lending, with very little consideration given to loan book concentration and the economies of scale needed to operate in this market. With around 19bn in assets, the sector is about the same size as PTSB. *However, unlike PTSB, this asset base is split 245 different ways. Your average credit union has €77.5m in assets.*



Agree completely.

There are only 55 credit unions with assets of over €100m.

Even at €100m I can't see how mortgage underwriting would make economic sense, asset base would need to be 3 or 4 times that. And presumably there are maybe a dozen CUs with that kind of asset base.

It will probably work for some, but isn't a panacea for the sector


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## Brendan Burgess (19 Oct 2020)

Excellent post 24601 - it should be sent out to the boards of the 245 different credit unions. 

The good Doctor is right about one thing -  the Credit Unions face an existential threat.  But it's not from the Central Bank. And the Credit Unions will not be able to face up and solve their existential threat until they focus on the real problem and stop getting hung up on the Central Bank.  

If the Central Bank did what the Wizard wants them to do, would it make any difference to the viability of credit unions? 

Brendan


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## Brendan Burgess (19 Oct 2020)

NoRegretsCoyote said:


> It will probably work for some, but isn't a panacea for the sector



I think that they need to set up a mutual building society.  Then they should tell their depositors to withdraw their money and put it on deposit with the CUBS. 

But I don't know how they would overcome the problem of capitalising the Building Society. 

The Central Bank does not like small financial services companies. And with the Credit Union's record of compliance, they would be very slow to authorise a new building society.  Which is a pity.

And it would have to operate completely independently.  They could not have the lending decisions influenced by lobbying from local credit unions. 

Brendan


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## RichInSpirit (19 Oct 2020)

Credit Unions were more important in the past when banks wouldn't lend to the "poorer" people. Their loan interest rates were very competitive at the time, at 12% per annum compared to 19% or 20% for a Bank loan in the 1980's. 
At the moment they are probably a victim of the times, with very low interest rates being available in the banks.
I don't wish to see their demise though as they may be very necessary again at some point in the future if interest rates go astronomical again.


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## NoRegretsCoyote (19 Oct 2020)

Brendan Burgess said:


> I think that they need to set up a mutual building society.




I think it probably just makes more sense for them to consolidate so they can lend at scale.

This takes them further away from their community origins for course.


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## 24601 (19 Oct 2020)

Brendan Burgess said:


> Excellent post 24601 - it should be sent out to the boards of the 245 different credit unions.
> 
> The good Doctor is right about one thing -  the Credit Unions face an existential threat.  But it's not from the Central Bank. And the Credit Unions will not be able to face up and solve their existential threat until they focus on the real problem and stop getting hung up on the Central Bank.
> 
> ...



Alas, that would be a futile exercise. Assuming the average board has 9 directors, that's 2,205 directors (with about 4,410 opinions!). I've provided advice to credit union boards and it's next to impossible to get 9 directors to agree on a course of action when faced with an existential threat. Imagine if the board of PTSB had over 2,000 directors? The tracker scandal would be the least of their worries. 

If the Central Bank did what Wizard wants them to do the viability of the sector would be even more troubled than it already is. We'd have plenty of small credit unions with volunteer boards, incompetent management teams and diluted capital chasing BTL loans in an attempt to address their viability issues. Also, another issue that I haven't really seen discussed anywhere is the risk appetite of credit union boards to repossess a family home. It's one thing for the big bad, faceless, bailed-out bank to enforce their security, it's quite another thing for a community co-operative based in a small, defined geographical area to try repossess a family home associated with a NPL, and as such, I've always viewed CU mortgages as closer to being unsecured lending, and this is in a country where it's next to impossible to repossess a family home.


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## Brendan Burgess (19 Oct 2020)

24601 said:


> it's quite another thing for a community co-operative based in a small, defined geographical area to try repossess a family home associated with a NPL,



Which is why I think it might work with a CUBS.  

Though oddly enough, the Credit Unions are not behind in pursuing defaulters.

They had a lot of people jailed when it was allowed. 

Their attitude was "It's our money and we want it back." 

Brendan


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## 24601 (19 Oct 2020)

Brendan Burgess said:


> Which is why I think it might work with a CUBS.
> 
> Though oddly enough, the Credit Unions are not behind in pursuing defaulters.
> 
> ...



Maybe there's a greater moral imperative to chase defaulters since they're effectively impacting their immediate neighbours in their communities by not paying?


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## NoRegretsCoyote (19 Oct 2020)

24601 said:


> Maybe there's a greater moral imperative to chase defaulters since they're effectively impacting their immediate neighbours in their communities by not paying?




All the stories of mortgage arrears and default on the banks involve borrowers getting through to a different person in a call centre every time and no point of contact for resolution.

I would imagine a typical credit union would be more focussed in dealing with someone in arrears. You would probably get the same person picking up the phone every time.


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## WizardDr (21 Oct 2020)

I cannot get BB off the high stool on the blunt nature of the 10% Reserve Ratio.
This ratio was made up.


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## Brendan Burgess (21 Oct 2020)

WizardDr said:


> I cannot get BB off the high stool on the blunt nature of the 10% Reserve Ratio.



As 24601 points out - it's not really relevant and is distracting you from reforming the movement.



24601 said:


> The reserve ratio is somewhat of a red herring.


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## 24601 (21 Oct 2020)

WizardDr said:


> I cannot get BB off the high stool on the blunt nature of the 10% Reserve Ratio.
> This ratio was made up.



Every reserve ratio is "made up". If there wasn't such a high reserve requirement for credit unions the number of failures would probably be far greater. Blunt and all as it is, the application of the requirement has resulted in the sector entering this crisis in far better shape than the last time around. There are far fewer credit unions at risk of failure now, and that's nearly exclusively because of their current reserve buffers. Perversely, the level of capitalization has probably created a level of inertia from a business model development perspective. 

You seem to be obsessed with the reserve requirement and completely oblivious to the core failing of the sector: it can't lend enough money. It is excessively exposed to environmental risks because the core of the business is weak, not because of any prudential requirement. The loans to assets ratio will probably fall to ~20% in the next year - 20% for what are supposedly "credit" unions?


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## Brendan Burgess (21 Oct 2020)

24601 said:


> it can't lend enough money



The Wizard's argument seems to be that if the CB just reduced this Reserve Ratio then the Credit Unions could give their members mortgages which would solve their existential problem. 

Brendan


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## Cavanbhoy (22 Oct 2020)

Involved in a Cu small town. mortgages are unrealistic. Loanbook growing year on year from a low base 2014. Problems are torn between been a bank in all but name or a community lender.  Provide valuable credit to members at reasonable rates to members who wont get loans from banks. Cost base very high.


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## WizardDr (22 Oct 2020)

@24601 @cavanboy @bbari1 

1. Its the central banks fault: In essence we were informed by no less than the Central Bank of a dire issue that a bail out of €500m was needed. We hjave heard no more about this fake news than we have heard about Donald Trump bringing jobs back. An eerie silence.

2. The Reserve Ratio does stop Credit Unions from taking money in on shares or deposits. There is no doubting that and it sets off a slow burning
fuse down the line where Credit Unions now have less than 25% lent out. This were severe restrictions on Credit Unions but there have been relatively few compared to the €500m that was er mentioned above.

3. 85 Credit Unions were doing mortgages of sorts according to Revenue as a year TRS was provided fro them.

4, This nonsense that mortgages are above the Credit Unions shoe size is often peddled. Now that the Law Society have altered the home loan process many of the risks in not getting title are resolved. Credit under writing is pretty straight forward. So much so that even the average can do it. I do not buy into the fake news saga.

5. Buy to Lets - the issue here was that the State grabbed USC and PRSI and Tax from the only asset a family might have. Generally speaking if there were relatively low LTVs there were few issues. To close this market off to Credit Unions (all of them) is simp;ly another overreaction and in any event not all in the Central Bank actually agreed with it.

6. The last Report on CU AML was a stand out because the CBI never raised the question of inadequate checks on the main business. Why would they do that when the Sector is responsible for 22% in the only DoJ report I could find.

7. Being the most trusted Brand should mean that they should be able to take my shares to at least €100k/

8 . The Central Bank do not take criticism well but we know they read these.

9. Why are CU Accounts not available as opposed to having to locate them at each Credit Union? Fundamental Analyst might go through them
and the overcooked Regulations.


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## EmmDee (22 Oct 2020)

WizardDr said:


> @24601 @cavanboy @bbari1
> 
> 2. The Reserve Ratio does stop Credit Unions from taking money in on shares or deposits. There is no doubting that and it sets off a slow burning
> fuse down the line where Credit Unions now have less than 25% lent out. This were severe restrictions on Credit Unions but there have been relatively few compared to the €500m that was er mentioned above.



Can you explain this to me - why would a business look to increase non-performing assets. I work in banking (not Irish domestic) and we went through the excercise of reducing expensive non-performing client deposits about 5 or 6 years ago and we are pretty analytical about what we take now.

If the problem for a Credit Union is the lack of performing lending in relation to the deposits, then the solution is to increase lending or reduce deposits. Not the ratio


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## 24601 (22 Oct 2020)

WizardDr said:


> @24601 @cavanboy @bbari1
> 
> 1. Its the central banks fault: In essence we were informed by no less than the Central Bank of a dire issue that a bail out of €500m was needed. We hjave heard no more about this fake news than we have heard about Donald Trump bringing jobs back. An eerie silence.
> 
> ...



I really don't know where to start with this. 
1. What has this got to do with the price of spuds? So what if the 500m wasn't needed? What exactly does this "prove"? (Hint: it's definitely not what you think it does)
2. This is complete and utter nonsense. The reserve requirement has absolutely no bearing on loans to assets. It doesn't "stop" them taking in shares/deposit, it just makes them ponder whether they should be taking them in when they can do nothing productive with them. Are you really arguing that the reserve requirement limits lending? 
3. And your point is? I could be doing mortgages out of the back of my van, it doesn't say anything about whether I should be or whether I am doing them in a compliant manner that makes money. Plenty of credit unions gave money to developers in the Celtic Tiger years. By your logic this fact somehow proves that they should be financings developers. 
4. You clearly don't understand credit risk to any meaningful degree. Either that or you're purposely ignoring the risks associated with loan concentration and the huge issues arising for mortgage lenders in the wake of the last downturn.
5. Good God. 
6. What? Apart from this making no sense, a number of credit unions have been subject to enforcement action on AML. The 2015 Report highlighted endless weaknesses. 
7. They can take your shares to at least 100k. That's literally the law. They may choose not to because they can't do anything with them. 
8. See point 5. 
9. See point 5.


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## 24601 (22 Oct 2020)

EmmDee said:


> Can you explain this to me - why would a business look to increase non-performing assets. I work in banking (not Irish domestic) and we went through the excercise of reducing expensive non-performing client deposits about 5 or 6 years ago and we are pretty analytical about what we take now.
> 
> If the problem for a Credit Union is the lack of performing lending in relation to the deposits, then the solution is to increase or reduce deposits. Not the ratio



He doesn't appear to have an understanding of basic asset-liability management. It's tedious at this stage.


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## Brendan Burgess (22 Oct 2020)

WizardDr said:


> 2. The Reserve Ratio does stop Credit Unions from taking money in on shares or deposits. There is no doubting that and it sets off a slow burning
> fuse down the line where Credit Unions now have less than 25% lent out.



Dr. Could you explain this  me in numbers. 

Take a typical credit union today

Loans to customers   100
Cash in the bank        300

Financed by 
Reserves 80
Members' shares 320 

The Big Bad Fake News Central Bank says that they must keep reserves of 10% of total assets. 

So they need 40 in reserves.   So no problem.

Their marketing is brilliant and their customers want to borrow another 100 

So the total assets remain at 400 and the reserve requirement remains at 40. 

It's not stopping this credit union lending money.

*Example 2 *


Loans to customers   100
Cash in the bank        300

Financed by 
Reserves 20
Members' shares 380 

Now this credit union has a 5% Reserve Ratio. 

But it can resolve this by returning 300 to its members 

Now the balance sheet is 
Loans to customers  100 

Reserves 20 
Members shares 80 

*I presume you would agree that the reserve ratio should be at least 10% of loans? *


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## NoRegretsCoyote (22 Oct 2020)

EmmDee said:


> non-performing client deposits



What is a non-performing deposit? (Excuse my ignorance)


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## Brendan Burgess (22 Oct 2020)

EmmDee said:


> expensive non-performing client deposits



I presume the word _expensive _is important here.   

Money which could not be lent out at a rate exceeding the cost of the funding. 

Brendan


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## EmmDee (22 Oct 2020)

NoRegretsCoyote said:


> What is a non-performing deposit? (Excuse my ignorance)



A deposit where I make no return on the increase in assets. A deposit costs me money as a bank (or CU). So I need to be able to get a return on that cash greater than the cost of holding it.

Taking customer deposits and sitting on them just increases expenses with no revenue


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## Pinoy adventure (22 Oct 2020)

NoRegretsCoyote said:


> What is a non-performing deposit? (Excuse my ignorance)



Something that costs the credit union money too hold on behalf of customers perhaps


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## WizardDr (22 Oct 2020)

24601 said:


> I really don't know where to start with this.
> 1. What has this got to do with the price of spuds? So what if the 500m wasn't needed? What exactly does this "prove"? (Hint: it's definitely not what you think it does)
> 2. This is complete and utter nonsense. The reserve requirement has absolutely no bearing on loans to assets. It doesn't "stop" them taking in shares/deposit, it just makes them ponder whether they should be taking them in when they can do nothing productive with them. Are you really arguing that the reserve requirement limits lending?
> 3. And your point is? I could be doing mortgages out of the back of my van, it doesn't say anything about whether I should be or whether I am doing them in a compliant manner that makes money. Plenty of credit unions gave money to developers in the Celtic Tiger years. By your logic this fact somehow proves that they should be financings developers.
> ...


I really don't know where to start with this
1. So the fact that a bogus report suggesting a rescue of €500m which ushered in the most Stalinist of controls is no big deal?
1A - Who produced the fake numbers to trigger this?
2. I said the taking of shares (increases liabilities AND assets) is limited the Ratio - FACT Eventually at the margin you could require additional assets to earn 10% which is not possible. In other words the build up of reserves means they are consolidated over years. When you get close to 10% ratio you must stop new savings or shares/ FACT 
3.It is simply outrageous to say the back of the van. In facf they have better systems than some banks
4. I wasn't commenting on Loan Concentration but you have so what relevance has the Common Bond got today except a restriction on trade. Why are you not expanding the common bond? If you have 60% LTV a nuclear bomb wont take it out.
5. Another highly prejudicial answer
6. Let us call this out.  There was little commentary on how CUs dealt with money, You would have thought this was the main issue in AML or that identification was an issue. This Report was silent on the main matters meaning that the Central Bank was satisfied with what it examined. It just does not actually say i   The biggest offence it did raise was 'Club and Society' accounts. Anything bad it stated it. Kept silent on anything good. Read the Report again 
7. They cannot take shares if they breach 10% ratio. Fact. So many of them the limit of €100k is irrelevant.
8. I hope you are not one of them
9. Why would the accounts not be on CBI website?


NOTE: Stop slagging off posters.


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## Brendan Burgess (22 Oct 2020)

WizardDr said:


> NOTE: Stop slagging off posters.



Come on Doctor. Be fair.

You are engaging in wild and entertaining language "fake news" etc. Don't be surprised if you get colorful replies.

Brendan


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## NoRegretsCoyote (22 Oct 2020)

EmmDee said:


> A deposit where I make no return on the increase in assets.



Aren't deposits fungible?

They certainly are for credit unions where almost if not all their liabilities will be deposits from members.


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## 24601 (23 Oct 2020)

I'm going to check out of this thread.


WizardDr said:


> I really don't know where to start with this
> 1. So the fact that a bogus report suggesting a rescue of €500m which ushered in the most Stalinist of controls is no big deal?
> 1A - Who produced the fake numbers to trigger this?
> 2. I said the taking of shares (increases liabilities AND assets) is limited the Ratio - FACT Eventually at the margin you could require additional assets to earn 10% which is not possible. In other words the build up of reserves means they are consolidated over years. When you get close to 10% ratio you must stop new savings or shares/ FACT
> ...



Firstly, apologies for my tone. It was meant as tongue in cheek for the most part but I do find this Central Bank Fake News narrative tiresome. I am certainly not slagging you off. I wouldn't get so worked up about it. I think you are ignoring most of the arguments being made to you so I responded in jest.

1. It wasn't a "bogus" report. The human race is particularly bad at forecasting. You might recall our projected deficit for 2020 was 30bn just a few short months ago, it's 20bn now. The 500m figure was arrived at due to the relative weakness of the sector when the Commission on Credit Unions reported in 2012. The report noted:
_The adverse economic conditions have resulted in a decline in credit union performance and have made it difficult for some credit unions to replenish reserves through retained earnings. As at 31 December 2011, of 403 credit unions that submitted prudential returns, 51 credit unions had total realised reserves less than 10% of assets and 25 credit unions could be considered seriously undercapitalised (less than 7.5%) 1 . At that time, 352 credit unions (87%) held at least 10% of assets as total realised reserves . _

You might search for some sort of conspiracy in the 500m figure but there is none. You can definitely make the argument that the sector was far more resilient than expected and that the self-funded bailout scheme was effective. Plenty of credit unions have drawn upon this fund, which in turn negated the need for state support. More generally, I do think the legislative framework is unwieldy. I wouldn't go as far as to say "Stalinist" though. It's a response to an industry that showed serious governance failures. Just because these were not on the same scale as the banks doesn't mean that credit unions were well run.

1A. I'm not 100% on the genesis of this 500m figure, but it's another distraction. I think it came from the Commission or from a stress test completed around the same time. I don't think it's the Trojan Horse through which the Central Bank disguised its evil legislative programme - indeed, it's the politicians that did that.

2. I don't understand the point you are trying to make. I also think a worked example of how the reserve requirement limits lending would be helpful. I fail to see how an industry with excess funding that it cannot lend this out is restricted in its lending by a 10% reserve requirement. Brendan's examples show this clearly. You have failed to engage meaningfully on this.

3. No, they don't. _Some _credit unions definitely have the capabilities to underwrite mortgages but this doesn't really address the risks at portfolio level.

4. You weren't commenting on loan concentration directly but your strategies to save the credit unions are to 1. dilute their capital base and 2. pursue types of lending that will lead to excessive levels of loan concentration. If credit unions want to go down the 60% LTV route, fair enough, but how do they compete at the lower rates offered by the banks in this market with such a high cost base and limited scale? IF you got rid of the common bond you might end up with one very large credit union covering the country with economies of scale - maybe you're onto something there.

5. Prejudicial? Really? I don't think the idea of credit unions doing BTLs is even worth discussion to be honest.

6. You're entitled to your opinions on this report. I don't draw the same conclusions from it that you do. The over reporting of suspicions does not really tell us a hole pile to be honest. For what it's worth I also don't think AML is major issue for credit unions any more. They are probably better at it than the banks given the common bond.

7. Yes, they cannot take in shares if they are undercapitalised. I see this as a good thing. You seem to want them to become even more undercapitalised.

8. You really have it in for the ould Central Bankers!

9. I don't know. I don't think it's a conspiracy. Most credit unions seem to put their accounts up online themselves. I don't think the CBI publishes the banks' accounts on their website either but I could be wrong.


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## Brendan Burgess (23 Oct 2020)

WizardDr said:


> 9. Why would the accounts not be on CBI website?



Hi Dr.

I don't think that any regulated entity has their accounts on the Central Bank website?   

I have asked different Credit Unions for their accounts over the years and they generally refuse on the basis that I not a member.  

There were some who did publish their accounts on their website.

You should make a submission to the Central Bank to require all Credit Unions to post their accounts on their website.

Brendan


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## NoRegretsCoyote (23 Oct 2020)

Brendan Burgess said:


> You should make a submission to the Central Bank to require all Credit Unions to post their accounts on their website.



I don't think they'd have the powers to make such a direction.

There is plenty of useful aggregate information on the sector here.


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## Brendan Burgess (23 Oct 2020)

Hi Coyote

I found looking at the individual credit unions interesting.

For example, many of them had loans which were at or below their reserves. So they could have returned all cash to their members and funded all their loans from their accumulated profits.

And that is what they should have done. 

The development of this was that they could have operated with a reserve of 50% of their loans.  Then the Central Bank could have applied a different set of very light touch regulations to these credit unions.  

But the Credit Unions are not interested in changing. They will just blame the Central Bank for all their ills and not look at their own practices.

Brendan


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## Brendan Burgess (23 Oct 2020)

Hi again Coyote

I have used those aggregate figures as of March 2019 for what I did with individual credit unions






In fact, they can hand back more cash as the net loans figure is probably only about €4 billion as some of those loans are backed by shares.  

Now they have reserves of €3 billion on total assets of €6 billion or 50%. 

They can still increase their lending by 20%.

The Central Bank would be able to sleep at night and apply a much less rigorous supervisory regime. 

If an individual Credit Union has reserves of 50%, I wouldn't care if they allocated 20% of their total loans to mortgages.  And nor should the Central Bank.

Brendan


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## Brendan Burgess (23 Oct 2020)

I meant to add that from my analysis, the Credit Unions seemed to be deriving a lot of their income from taking in deposits from members at 0% and putting them back on long term deposit elsewhere at, maybe, 2%.   

So they did not want to give back these deposits. 

Now they are in a very difficult position in that they can no longer use the deposits profitably.  They pay nothing on them and they earn nothing on them. 

They have some investments which they placed at fixed rates some years ago which are still in place. But when these mature, the Credit Unions will be snookered.  And if the banks start charging negative interest rates to the Credit Unions on large deposits, it will make the position worse.

The Wizard is right in one thing - there is an existential threat to the Credit Unions - but it's not the Central Bank.

Brendan


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## NoRegretsCoyote (23 Oct 2020)

Brendan Burgess said:


> I found looking at the individual credit unions interesting.



I agree. You can find the accounts of some large credit unions online (Navan, Naas, I think).

What struck me was how much they spend on marketing given that they are local monopolies.


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## NoRegretsCoyote (23 Oct 2020)

Brendan Burgess said:


> Hi again Coyote
> 
> I have used those aggregate figures as of March 2019 for what I did with individual credit unions
> 
> ...



I think you're a billion out on the arithmetic in third line but otherwise completely right on substance.

As a whole the sector can sort out the problem of excess deposits by returning them to members, or indeed charging them for it.

Ultra-low interest rates are here to say and all sorts of financial firms have to figure out how to stay profitable.


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## WizardDr (23 Oct 2020)

This is now a better argued thread than previous.

About the Regulatory Reserve Ratio -  I said previously that had Bank of Ireland had the same ratio of 3% that it would  not have been bailed out so clearly when the Basle Ratio was being mooted despite all the ways of doing this such as risk adjusted weightings. 

What I am saying is that the first thing the ratio causes the credit union to stop taking savings which I regard as ludicrous.
That limits its asset size because when shares / deposits are place in CU either Bank or Cash goes up so Assets rise as well as liabilities,

All the examples have to be viewed on the marginal case: If Credit Union A has total assets of €100m (all in Government Bonds) then it still has to have a  10% reserve ratio. Let us assume it has exactly that and it is break even.  So it has reserves of 10%. Then it gets a Deposit of €1m and immediately invests in Government Bonds then its ratio should be €10,100,000.  But it breaks even on operations all ready so it cannot come up with a €100k from anywhere.

It can switch some to lending so even if it accepted the deposit and lent out €1,000,000 @6% its earning would be €60,000 still €40,000 short.

It is still short. What the ratio does is in effect limits the size of the Credit Unions and has actually worried them all about a breach of the ratio rather than accept the funds as its a trusted brand etc.

As regards concentration risk its size and its common bond dictates that in essence it has concentration similar to a branch of a Bank. It could be argued that RR needs to reflect that but Basel rule of thumb was 3% - a ratio of three times that tells me that this was used simply because most credit unions before 2008 were at that level anyway. The average number of mortgages for a ban branch is 1 per week even at the height. Vanilla Equity Release that is paid back mortgages for the over 50s is where they should be heading. The central bank should revise the ratio before as it is unfairly calculated/

BB thinks you had the money back but that's similar to closing down and philosophically BB sees CU as having no worthwhile functions and has bought into the  view that they are incompetent. So he wont wade into the issue.

I believe that some Government Borrowings should be sourced from here. I would prefer CU to do mortgages and I simply do not accept the competence piece I think its plain nonsense.

Lets have more on the Ratio please.


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## Brendan Burgess (23 Oct 2020)

Hi Wizard

The 10% reserve ratio does not stop the Credit Unions from lending.

It stops them from taking on more deposits.

The limit on the lending is just that there is no demand for it. 

You seem to want the Credit Unions to take on more and more deposits. Why?



WizardDr said:


> As regards concentration risk its size and its common bond dictates that in essence it has concentration similar to a branch of a Bank



That is a ridiculous comparison. If the Ballyhaunis branch of Bank of Ireland is hit hard by a closure of a huge local employer, it's one loss out of hundreds of branches of the same entity. BoI won't become insolvent as a result.  But the Ballyhaunis credit union could easily become insolvent if many of its members are hit.

Brendan


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## county (23 Oct 2020)

In relation to Credit Union lending there is no one silver bullet to resolve this.  Credit unions need to offer a mix of loans personal, small business, community loans and some home loans.  
They need to seek out niche segments within each of these markets.  There is scope for credit unions to do home loans but need to focus on specific elements of this market.  It would not be advisable to compete for the ultra low margin business. 
Looking at the loan portfolio's of credit unions at present tells me that they are highly concentrated (personal lending) and with a high churn rate. By offering other loans types it will reduce this concentration risk and offering longer term products will reduce the churn and make it a small bit easier to get the loan book to grow.  
I much prefer to deal with a credit union for borrowing even if I have to pay a small bit extra.  I find the staff extremely helpful and most importantly they are not trying to cross sell other products to me.  I see the work they do for the community and how they have helped many who would otherwise not have been able to progress.  There is a role for such an institution in our communities.


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## Paul O Mahoney (28 Oct 2020)

The threat is from people who want CUs to be competitors to the banks, the movement was never designed for that it was designed to promote saving and thrift.
I had the opportunity  and took it, to cost up a 3 year strategic plan for a large community based CU, and after 4 months of analysing and understanding and presenting the results Ill guarantee you only 3 out 15 directors understood it, thats 15 years ago.

But and I said this during my presentation " the day CUs become banks or try and compete with banks is the day the spirit of the CU movement will begin to die, Personally I would prefer this credit union to have 1000 €500 loans out rather than having 1 €500,000 loan out "

And thats my view today,  CUs are cooperatives and were set up to serve the community,  but now many on this thread believe that they should go down the road of fractional reserve banking, fine but its the members who should be consulted on this not anyone else.

CUs aren't banks some may wish they were but those are the ones that will wreck it....

Newbridge,  Enfield,  Firhouse, Drumcondra, to name a few, there's enough evidence to support the way things have been done since the 50s, obviously modern technology and money laundering legislation needs to be used but the ethos,  the community importance are more important than 3% ratios


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## WizardDr (29 Oct 2020)

Dear Readers 

I have repeatedly asked BB to comment specifically and exclusively on the Ratio. 

Growing savings is central to the Credit Union ethos and is that is stifled - then we should examine how this Ratio was put in place and apart from 10% being better than 3% what is the appropriate %. BB fails to engage meaningfully on that except he states it does not stop them lending at the moment. 

@Paul mentioned a few noted failures - just remembering that the only Bank that did not go under was  Post Office Savings Bank. Can anyone name another retail Bank?


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## Brendan Burgess (29 Oct 2020)

Hi Dr

It seems right to be putting about 10% of their loans aside.

It seems excessive to me to require a Credit Union to have to  put 10% of their deposits aside for reserves.

But it's irrelevant, as it does affect their capacity to lend. 

And anyway,they can release their reserves by returning the unlendable shares to their members.

I asked you to explain to me how the 10% stops the Credit Unions from lending? 

Brendan


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## WizardDr (29 Oct 2020)

You see I already gave you an example. At the moment many CUs have to carefully attend to minding that their share balances do not creep upwards (a liability but then there is an asset Bank or cash) I gave you a fully worked example where it did stop lending but I will give you another.

CU A is right on the ratio of 10%. A new member wants to borrow three time his savings that he is bringing with him and has a tremendous savings habit.  The CU receives €100k in savings (Debit Bank Asset Credit Shares Liability) The CU then lends €300,000 (Credit Bank Debit Loan so no change in overall assets as there is a swop from Bank to Loans).

H/ever the CU needs to put €10,000 aside NOW. Where and how will it get it? (assume only reserves are the Regulatory Reserve Ratio and its now reading less than 10%.


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## 24601 (29 Oct 2020)

WizardDr said:


> CU A is right on the ratio of 10%. A new member wants to borrow three time his savings that he is bringing with him and has a tremendous savings habit.  The CU receives €100k in savings (Debit Bank Asset Credit Shares Liability) The CU then lends €300,000 (Credit Bank Debit Loan so no change in overall assets as there is a swop from Bank to Loans).
> 
> H/ever the CU needs to put €10,000 aside NOW. Where and how will it get it? (assume only reserves are the Regulatory Reserve Ratio and its now reading less than 10%.



Has the 100k just been lodged in your example? I'm not sure what you're saying makes any sense. If the assets haven't changed the reserve requirement hasn't changed. If 100k has just been lodged then assets obviously have changed. 

Brendan has clearly said he thinks the reserve requirement is probably a bit high but this is all moot given that the risk arises from credit unions not being able to lend the excess funds they have. In your example they should simply lend the member the money and refuse the deposit. The average reserve and loans to asset ratios are a pretty clear illustration that your issue is imagined. It would be bizarre for a credit unions to maintain average reserves of 16% if doing so makes it somehow difficult to lend. 

The real issue is that loads of credit unions have older investments/deposits with reasonable yields maturing over the next year or so. It was fine when they were getting the money for free from members and going across the road to AIB/BOI/PTSB and getting 3 or 4% on that but it's a much different animal when they're going across the road and getting -1%. You don't seem to recognise this risk and you haven't illustrated how a credit union is limited in its lending because of the reserve ratio. They're about 25% lent, so this hypothesis is fundamentally wrong. 

I think @county summarises the challenge pretty well. Credit unions have fenced off the small, shorter-term segment of the personal loans market. This is not a good long term strategy and exposes them massively to existential threats, but these threats are not the threats identified by @WizardDr , they're the normal macroeconomic ones. Low interest rates and limited demand for non-mortgage credit has exposed the current business model. This is particularly evident with something like COVID - if your loan book is turning over every 2 or 3 years it will drop like a stone when something like this happens. They need to address their loan book composition so that it trends longer-term but this needs to be done in a risk-appropriate manner and not by throwing caution to the wind on buy-to-lets or trying to compete with the banks on mortgages - that will only end in disaster. 

A short term strategy that will have a meaningful impact is the return of savings to members. I don't agree with Brendan that it should all be handed back - such a solution doesn't really factor in the demography often served by credit unions and the importance on non-lending services offered in communities - but they absolutely should be cutting their cloth to measure and aggressively shrinking their balance sheets so that they can service the loan market that is there with an optimum level of funding. They need to revisit the business model in the mean time and either achieve the scale needed to make the non-personal lending markets viable or they need to use their excess funding to do things like Brendan has suggested, such as setting up CU-funded building society.


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## Brendan Burgess (29 Oct 2020)

WizardDr said:


> All the examples have to be viewed on the marginal case: If Credit Union A has total assets of €100m (all in Government Bonds) then it still has to have a 10% reserve ratio. Let us assume it has exactly that and it is break even. So it has reserves of 10%. Then it gets a Deposit of €1m and immediately invests in Government Bonds then its ratio should be €10,100,000. But it breaks even on operations all ready so it cannot come up with a €100k from anywhere.
> 
> It can switch some to lending so even if it accepted the deposit and lent out €1,000,000 @6% its earning would be €60,000 still €40,000 short.



Sorry Dr. I had not noticed that reply or the example in it.

I appreciate that you have a Ph.D. in Credit Unions, so clearly you are correct. But I do not follow it. Is this what you are saying. ( You say all in Government Bonds but I presume you mean all non loans in government bonds.) 







It looks to me and I only did Credit Unions up to the Inter, that the 10% is stopping them from taking on more deposits rather than preventing them giving out more loans? 

Now that you explain it like that, you have convinced me that the Central Bank is right to insist on 10%.  It is their way of saying: Lend more and stop putting savings at risk by taking in money you don't need. But if you do want to be a deposit union, you will need plenty of reserves.

Brendan


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## Paul O Mahoney (29 Oct 2020)

This is a very complicated thread, If the ratio was dropped to 3% would the CU be able to lend out more? Who knows 10% doesn't stop them now.
In whos interest is it that the ratio is dropped to 3% ? Well certainly not the members,  they couldn't give a toss if it was 30% because a, they won't understand it, and b, they are in general only concerned about having their savings secure,  be able to get a loan for a car or holiday or college etc........and getting their death benefit to pay for the funeral.

The above would represent 90% of credit union members,  and yes dividend was important to them,  but after witnessing what the unfettered greed and illegal practices the global banking during the crash and how most banks were bailed out the average CU really wants a local community based financial service that they can deposit a bob into and also borrow a few more bob.

Its my opinion that the debate above is academic as the league wouldn't endorse it, if the league still exists, it goes against the ethos and if it was explained to members that the risk to the CU of having a lower ratio " like the banks" they'd tell any proposer to feck off. People are happy with CUs in general those who want bigger loans can apply to banks because CUs aren't banks period


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## Paul O Mahoney (29 Oct 2020)

CU funded co-op or mutual would work but the politics of getting agreement from all CU boards would be almost impossible, most don't even agree internally. 
Imagine trying to explain "economies of scale, or ROI etc to volunteers directors and then Members  

If its not  broke don't fix it.


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## Paul O Mahoney (29 Oct 2020)

Whatever happened to CUDA anyway weren't they going to revolutionise who CUs were going to maximise returns for members, by all this new fangled dangled leveraging stuff, Newbridge gave a pretty clear answer.


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## Paul O Mahoney (29 Oct 2020)

24601 said:


> Maybe there's a greater moral imperative to chase defaulters since they're effectively impacting their immediate neighbours in their communities by not paying?


Some regard defaulters as hero's and its a long process, years to get back €1500 easier to keep the savings and w/o the balance.


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## Brendan Burgess (29 Oct 2020)

Paul O Mahoney said:


> If its not broke don't fix it.



Hi Paul

Do you not think it's very broke? 

They have very few borrowers. 
They are living off the returns on money put on deposit at fixed rates a few years ago.
They will have very little income over the next few years

And all those trips to Credit Union conferences around the World don't come cheap.

Brendan


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## Paul O Mahoney (30 Oct 2020)

Brendan Burgess said:


> Hi Paul
> 
> Do you not think it's very broke?
> 
> ...


Certainly there are issues,  low interest rates elsewhere will always and has always reduced borrowing and I doubt that the movement ever experienced such a long period of low interest rates and yes it does reduce income, increases deposits and reduces dividend/ returns to members.

But, that wouldn't for me, classify the entire system broken. There is certainly much to improve the structure of the movement is outdated, deposits must be used to generate income,  a step up to modern technology done properly and holistically.
I'm not sure if legislation has changed since 1997, but there are many factors and processes within the movement that need looking at to increase efficiencies to improve economies of scale for the whole movement. 
Consolidation is inevitable and will continue, but again this needs to be seen as something that favours the members and the community as a whole,  our local CU Maynooth was "merged " with the larger one Naas , people here still think it was a hostile takeover.  When I pointed out to some the Maynooth CU had serious issues they simply didn't want to hear.
Now the annual budget saving type account is no more and home improvement loans of 20k plus apparently on offer, just seems that our "new" CU isn't interested in small loans anymore. And this is a mistake in my view

There is undoubtedly issues but CUs effectively becoming banks is not the solution in itself,  I don't think that the 10% ratio is an issue , and from memory its always been in place, bad debts or a least their provision from memory was a weird calculation where any deposits were automatically taken off the provision.

Many things probably have changed since I was involved around 2005, but the principle of the movement shouldn't change , promoting savings and thrift is a good thing, dividends was also an attractive marketing tool, but thats not coming back anytime soon,  CUs need to be creative for example rebate of some interest paid on loans or some other type of incentives to attract more loan uptake .

A functional community based/owned financial service is vital in an economy and does come with challenges but that shouldn't include fractional reserve banking.
And CUs shouldn't be simply compared with banks to see if they are maximising loans or ROI there are other/ substantial non financial benefits that accrue to people and communities from having a CU these will disappear and so will the movement. 

Theres more to finance/banking than bottom lines, or lines of credit, or bonds, CDO........

The league if still as powerful as it was needs reform too, its a political launch pad, a place for ex- priests to earn 100k plus, as you mentioned Vegas isn't cheap, its monopoly on life assurance to members is another area if not changed should, drag it into the 21st century it won't come easily but come it must.


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## 24601 (31 Oct 2020)

Brendan Burgess said:


> Hi Paul
> 
> Do you not think it's very broke?
> 
> ...



I wonder how many credit unions cover their outgoings from loan interest income. Those credit unions are probably run well.


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## Pinoy adventure (31 Oct 2020)

Brendan Burgess said:


> Hi Paul
> 
> Do you not think it's very broke?
> 
> ...



Brendan I would of though they have loads of small too medium loans on there books Turing over good returns on the interest side ?


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## Paul O Mahoney (31 Oct 2020)

Pinoy adventure said:


> Brendan I would of though they have loads of small too medium loans on there books Turing over good returns on the interest side ?


They are struggling to an extent,  "high street" interest rates are now probably lower, but , and I will stand corrected here, the interest on CU loans was/is a reducing balance interest calculation. 
Additionally in the past CUs would help any borrower who was getting into or was in difficulty of course in times of old you had to be saving for 13 weeks before you could get a loan, AFAIK thats gone. 
They aren't marketing properly in my view, communities want a functional alternative financial resource however now the focus is  the same as the banks..
We all remember the S&L debacle in the US in the late 80s early 90s they never recovered and I can see our CU movement going down a similar road, unfortunately.


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## Paul O Mahoney (31 Oct 2020)

24601 said:


> I wonder how many credit unions cover their outgoings from loan interest income. Those credit unions are probably run well.


Very few Id say I know when I was involved interest income from bonds, almost exclusively sold by Davy then contributed a fair ball of money to income. 
Again this was 2004/05 just as the economy was going mental. 
The idea of a co-op mortgage company is a good idea, and so is an investment type co-op .
CUs will have to start investing in community initiatives for example community based energy generation,  they will also benefit from the profits and increase their presence in the community. 
Of course there are lots more they could invest in .......


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## WizardDr (3 Nov 2020)

One of the reasons that Credit Unions were set up was to foster growth in savings.

Second was how to borrow carefully.

Third was Community.

Fourth was Financial Education.


The Financial Times recently highlighted how bad the public were at understanding basic financial maths such as Credit Card payments and interest.

BB - is against credit unions but he clearly is not concerned that the Credit Union saying NO to savings (or shares but they are classified by CBI as Deposits) dilutes and remove Pillar 1.  Pillar 2 is heavily restricted - but has been opened and closed at the same time. Pillar 3 is getting remote as the CU take over smaller ones. Pillar 4 is most important and probably the lest understood but the one that CU can do best at. Simple provision of Budges account referred to by @Paul above where he laments its passing when one CU was taken over by another who didn't provide a Budget Account.

Actually @Paul probably realizes its importance because by setting out one's income and outgoings translating into peaks and troughs with the key result of understanding whether you were going to be over / under during the year and taking action accordingly.  This was probably one of the cleverest product that some Credit Unions have (or haven't ) and @Paul is spot on. It spells out whether a CU member is living beyond their means with actions taking to rectify and is an outstanding product if used properly. BB has never known what its like not having the funds to pay household expenses. 

BB makes the usual statement about paying back the excess.  Where does the excess go when a member gets it back? So what happens the savings habit? Surely it is not a major step to allow CUs to place excess deposits with NTMA? Not necessarily paying anymore than what the Banks pay but recognizing Pillar 1. Just because they achieved the ratio by not paying out dividends in the past and could meet a ridiculous 10% when it has no support other that its higher than 3% is baloney.  Many people save because of the Credit Unions. Savings is a good thing and should be encouraged .

The accounting equation where when CU receive payment for Shares (or Savings as the shares are treated as savings) that Assets and Liabilities rise is simply the case. BB makes the watery argument (totally ignoring Pillar 1) and says it does not stop them lending is true but its a weak argument. Indeed noting that the Mortgage to Rent scheme is financed by Local Authorities and by Bank lending - surely those borrowings by Housing Associations could be funded partly by Credit Unions? The dizzy lending is 66% approx. by banks it could be argued is funded by CUs but they lose the margin to the middle man.  As these borrowings are in fact state guaranteed then why should CUs not fund them?


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