# Some Credit Unions Now Capping Balances at €15,000



## Lightning

Some Credit Unions Now Capping Balances at €15,000. 

Irish times article here. 

This is obviously a direct consequence of negative interest rates.


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## Brendan Burgess

And it's long overdue. 

It was crazy for them to be taking deposits from members when they couldn't lend them on. 

Brendan


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## noproblem

Changed times, who would have thought that this could ever happen? Then again, with all this negative interest rate journey I have no doubt some very bright spark will come up with a business plan to suit the situation.


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## Slim

Our credit union capped deposits and shares 15 years ago because of the inflow of savings versus the difficulty in competing with banks on lending.


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## Lightning

Kildare CU are capping at 20k now.


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## Ciadan

My 80 year old father got a letter yesterday telling him he has to withdraw his shares  by 30th April to bring the balance down to €20k. His current balance is approx €33k.


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## 24601

Ciadan said:


> My 80 year old father got a letter yesterday telling him he has to withdraw his shares  by 30th April to bring the balance down to €20k. His current balance is approx €33k.



I would imagine the current crisis will result in much more of this happening. Saving rates will increase in the coming months at the same time as increases in arrears (and bad debt provisions) and falling loan demand. They have nowhere to put this money so they need to return it to members.


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## Ciadan

24601 said:


> I would imagine the current crisis will result in much more of this happening. Saving rates will increase in the coming months at the same time as increases in arrears (and bad debt provisions) and falling loan demand. They have nowhere to put this money so they need to return it to members.


I've been trying to get through to the CU to see what will happen if he doesn't withdraw by 30th April. but the phone isn't being answered.

Considering he's 80 and "cocooning", I wonder how they expect him to get to the branch to withdraw this money.


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## NoRegretsCoyote

24601 said:


> I would imagine the current crisis will result in much more of this happening. Saving rates will increase in the coming months at the same time as increases in arrears (and bad debt provisions) and falling loan demand. They have nowhere to put this money so they need to return it to members.



How does this work in practice? Supposing you just refuse to withdraw or ignore the letter?

What if your only account is at the CU? Are you obliged to withdraw it in cash?


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## 24601

Ciadan said:


> I've been trying to get through to the CU to see what will happen if he doesn't withdraw by 30th April. but the phone isn't being answered.
> 
> Considering he's 80 and "cocooning", I wonder how they expect him to get to the branch to withdraw this money.





NoRegretsCoyote said:


> How does this work in practice? Supposing you just refuse to withdraw or ignore the letter?
> 
> What if your only account is at the CU? Are you obliged to withdraw it in cash?



Nothing will happen. There's actually no mechanism for them to force withdrawal as far as I know. They might pester people but they are dependent on voluntary compliance. Most operate a bit of common sense and won't create hassle for older and/or vulnerable people but many are trying their level best to get the money off the balance sheet.


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## EmmDee

Can they start charging on large balances?


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## 24601

EmmDee said:


> Can they start charging on large balances?



It's not clear. My own interpretation of the Credit Union Act is that they can but I have seen opinions to the contrary. I think they could impose a cap on share accounts (savings) and do the following:

Request members to withdraw excess savings above €XX,000 by a certain date, 
Where the balance has not been reduced below the cap transfer the excess balance to a deposit account which will be subject to a negative interest rate. 
Most credit unions introduced caps on savings but allowed members to keep their existing balances at the date it took effect - this had limited impact on slowing the growth as most growth was driven by an accumulation across lower balances. There appears to be very little appetite for a savings cap as low as would be required to minimise this sort of growth so many are now examining returning savings to members above their cap. This is complicated by the fact that they need co-operation to achieve this and they can't physically force someone to do an EFT, withdraw money or cash a cheque. They should probably impose low enough caps and hope for high levels of compliance. 

I think it's probably unlikely that they will start applying negative interest rates because of the huge reputational risks, but at this stage, who knows? Some will probably have no choice.


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## WizardDr

Let us be clear why CUs are seeking to cap Shares and Savings.

It is because of the lunacy of the conjured up Reserve Ratio of 10% against ALL Assets.

So when CU get €100k in Shares (liability) they have also an Asset (bank or even government bonds) and because of the increased asset - they must hold 10% reserve.

This reserve is only out of retained profits 

The fact that they increasing or not increasing lending is irrelevant.

If the ratio was 4% -no bank would have needed rescue. There is a basis for that size of ratio. Not 2.5 times that again.

There is no academic research supporting a ratio of this level.  It is an entire fiction but the hapless ILCU do not seem to know how to take on CBI on fictions.


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## EmmDee

WizardDr said:


> Let us be clear why CUs are seeking to cap Shares and Savings.
> 
> It is because of the lunacy of the conjured up Reserve Ratio of 10% against ALL Assets.
> 
> So when CU get €100k in Shares (liability) they have also an Asset (bank or even government bonds) and because of the increased asset - they must hold 10% reserve.
> 
> This reserve is only out of retained profits
> 
> The fact that they increasing or not increasing lending is irrelevant.
> 
> If the ratio was 4% -no bank would have needed rescue. There is a basis for that size of ratio. Not 2.5 times that again.
> 
> There is no academic research supporting a ratio of this level.  It is an entire fiction but the hapless ILCU do not seem to know how to take on CBI on fictions.



Irish credit unions don't have a problem meeting reserve requirements - their problem is the opposite. They average over 16% reserve ratios with some over 30%. They can't utilise deposits. 

You could make it 1% and they'd still be pushing deposits out the door


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## RedOnion

EmmDee said:


> Irish credit unions don't have a problem meeting reserve requirements - their problem is the opposite. They average over 16% reserve ratios with some over 30%.


Out of interest, did you take a look at the regulatory reserve ratios of the credit unions that have actually imposed savings caps?

It's very much a factor in putting savings caps in place.


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## WizardDr

What I am saying is that people should be free to put savings (and there will be zillions as we hit recession) CUs should be able to grab the opportunity.

CBI brought in cap for delusional reasons that were touted (€500m in bailout) that turned out to be bogus.


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## Pinoy adventure

Our local CU is capped at €30k


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## 24601

WizardDr said:


> Let us be clear why CUs are seeking to cap Shares and Savings.
> 
> It is because of the lunacy of the conjured up Reserve Ratio of 10% against ALL Assets.



That's not the full picture. As has been mentioned there is no problem maintaining capital adequacy in the near term, although it will become more challenging. The main problem is that they're only around 30% lent. With interest rates where they are they have no business taking €100 from Mary and going across the road to pay AIB to take it on deposit. They're destroying wealth doing this. There's also other residual insurance and operational costs associated with taking the money. They're not investment clubs so a savings cap is appropriate. 

The peculiar thing is that contrary to your point, the high regulatory reserve requirement, and the general move by the sector to build up huge buffers on top of this, will likely see it weather the impact of COVID - so despite all the cribbing about the reserve requirement it is serving its purpose and judging from the average reserve ratio credit union boards are content with it. 

There's plenty of credit unions with failing business models that can limp on for 3 or 4 years thanks to their robust capital base. Is that a good use of earnings built up over the last decade?


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## NoRegretsCoyote

The problem is at least partially age-related. Credit unions have a lot of older members who save but don't borrow. Over-55s account for half of all savings but about a quarter of all loans. 

The 30-54 age group borrows more than it saves (as you would expect) but the deposit base seems to have a very old skew.

See slide 15 here.


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## EmmDee

WizardDr said:


> What I am saying is that people should be free to put savings (and there will be zillions as we hit recession) CUs should be able to grab the opportunity.
> 
> CBI brought in cap for delusional reasons that were touted (€500m in bailout) that turned out to be bogus.



CU's could grow deposits. But what would you advise them to do with the increased balances. Regulatory ratios are an added complication but fundamentally not the core issue - start with the core question - if you're a CU with €100's of millions in balances, what do you do with it


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## Gordon Gekko

The problem is much simpler than people are making out. The credit unions earn negative returns on the deposits and then not enough customers borrow. They should pass those negative returns on to customers.


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## 24601

Gordon Gekko said:


> The problem is much simpler than people are making out. The credit unions earn negative returns on the deposits and then not enough customers borrow. They should pass those negative returns on to customers.



I agree but the reputational risk is seen as too high, especially when no bank has passed on negative rates to Joe and Jane Bloggs (yet!). They should definitely explore some sort of happy medium. You could have savings up to some nominal amount earning nothing (e.g. €10k) with anything above this is put into a deposit account earning a rate linked to their average reinvestment rate. 

Alas, some are still paying dividends on members' savings. A peculiarity of the legislation is that they have to pay a dividend on savings to be allowed to pay a rebate on loan interest which seems bonkers from a balance sheet risk management point of view. 

Their representative body is lobbying hard at present to have the regulatory reserve ratio relaxed. This boggles the mind when you look at the average reserve ratio of ~16%.


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## EmmDee

WizardDr said:


> Let us be clear why CUs are seeking to cap Shares and Savings.
> 
> It is because of the lunacy of the conjured up Reserve Ratio of 10% against ALL Assets.
> 
> So when CU get €100k in Shares (liability) they have also an Asset (bank or even government bonds) and because of the increased asset - they must hold 10% reserve.
> 
> This reserve is only out of retained profits
> 
> The fact that they increasing or not increasing lending is irrelevant.
> 
> If the ratio was 4% -no bank would have needed rescue. There is a basis for that size of ratio. Not 2.5 times that again.
> 
> There is no academic research supporting a ratio of this level.  It is an entire fiction but the hapless ILCU do not seem to know how to take on CBI on fictions.



Just on this - I think there are two separate issues being confused / conflated.

Reserve requirement is the amount of customer deposits that a bank (am assuming CU) must hold aside as liquid assets. I think this is what you are referring to with the 10% ratio i.e. if a CU takes €100 in deposit, it must keep at least €10 in cash and can in theory lend out €90. This reserve is not out of "own funds" or retained profits. It is a reserve of customer deposits that must be kept as liquidity. 10% is not an unusual amount for banks - it is the level large US banks have to hold for example. It can be higher in some countries

The Capital Ratio (under Basel regulations) is the level of "equity" or reserves that a bank needs to have to support it's activity. It is based on the risk weighting of it's assets e.g. loans, investments etc. Minimum tier 1 capital ratio for banks under Basel is 8% but most large international banks are operating significantly above this. In the last crises, the banks which were operating at 8% or close to it required additional capital injections. 4% would be suicide in any period of volatility. For a CU, the risk assets would be loans. But if the loan book is shrinking, RWA and capital ratio would be shrinking. It is directly tied to assets (loans, investments) and not liabilities (deposits)

The difficulty is that both the reserve and capital are earning nothing at the moment (in fact - probably costing money). Added to that is a high reserve because they can't lend. If I keep 10% of deposits in cash but can lend out 90% at a reasonable rate, I cover the cost of the 10% plus a margin. But if I can only lend out 50% of deposits, the rate I need to earn on this 50% to (a) cover the negative rate on the reserve plus (b) the cost of the capital to cover the risk means I am losing money 

There is a lot of academic research and investigation into capital requirements - these levels weren't made up over a pint


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## NoRegretsCoyote

24601 said:


> I agree but the reputational risk is seen as too high, especially when no bank has passed on negative rates to Joe and Jane Bloggs (yet!). They should definitely explore some sort of happy medium. You could have savings up to some nominal amount earning nothing (e.g. €10k) with anything above this is put into a deposit account earning a rate linked to their average reinvestment rate.



I think their deposit base is so sticky they would lose little enough in the short run by imposing negative rates, especially on higher balances.

The legality of this is untested I think. This was raised earlier in the thread or on another.


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## RedOnion

EmmDee said:


> Just on this - I think there are two separate issues being confused / conflated.


No, you're confusing banks and credit unions.

Credit unions, by law, must hold 10% regulatory reserves against their entire assets. It has nothing to do with Basel or liquidity. It's set out in the Credit Union Act, and the rate was set by the Central Bank. And it's not total reserves, but regulatory reserves. 

Credit unions don't risk weight their assets. It's based on total assets.


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## NoRegretsCoyote

RedOnion said:


> Credit unions don't risk weight their assets. It's based on total assets.



Yeah this part sounded strange. Most credit unions wouldn't have the capacity to apply an IRB approach.

Isn't this also why regulators have been wary of letting CUs get into the mortgage business?


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## 2bmortgagefree

With the cash reserves that Credit Unions have, I think the Credit Unions should be allowed enter the mortgage market to compete for switcher mortgages with good loan to value. It would introduce competition to mortgage market and allow credit unions function.


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## RedOnion

NoRegretsCoyote said:


> Isn't this also why regulators have been wary of letting CUs get into the mortgage business?


Ah, there are many reasons the regulator stops credit unions doing certain things. In reality not all credit unions are the same, but they all get tarred with the same brush when it comes to decisions.


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## Siobhánín

24601 said:


> It's not clear. My own interpretation of the Credit Union Act is that they can but I have seen opinions to the contrary. I think they could impose a cap on share accounts (savings) and do the following:
> 
> Request members to withdraw excess savings above €XX,000 by a certain date,
> Where the balance has not been reduced below the cap transfer the excess balance to a deposit account which will be subject to a negative interest rate.
> Most credit unions introduced caps on savings but allowed members to keep their existing balances at the date it took effect - this had limited impact on slowing the growth as most growth was driven by an accumulation across lower balances. There appears to be very little appetite for a savings cap as low as would be required to minimise this sort of growth so many are now examining returning savings to members above their cap. This is complicated by the fact that they need co-operation to achieve this and they can't physically force someone to do an EFT, withdraw money or cash a cheque. They should probably impose low enough caps and hope for high levels of compliance.
> 
> I think it's probably unlikely that they will start applying negative interest rates because of the huge reputational risks, but at this stage, who knows? Some will probably have no choice.


They can....they posted me a cheque during the week. Have opened a post office book account. Will be using the money soon for refurbishment but will there be consequences for lodging over 10k in a post office book account?


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## Pinoy adventure

Siobhánín said:


> They can....they posted me a cheque during the week. Have opened a post office book account. Will be using the money soon for refurbishment but will there be consequences for lodging over 10k in a post office book account?


No there shouldn’t be as long as you have proof of where the money came from too satisfy money laundering regulations


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## deco87

CiaranT said:


> Some Credit Unions Now Capping Balances at €15,000.
> 
> Irish times article here.
> 
> This is obviously a direct consequence of negative interest rates.


Where could you put money over balance being capped ? Safely , without losing value - uncle has 50 k over - balance capped - he is very worries this is his money for emergency- peace of mind


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## ClubMan

deco87 said:


> Where could you put money over balance being capped ? Safely , without losing value - uncle has 50 k over - balance capped - he is very worries this is his money for emergency- peace of mind


You'll have to read some of the other threads in the banking/deposit/investment forums as there's no easy answer.
Sticking it on deposit in a bank or the Post Office is one option.
But that will probably be at 0% or less interest and maybe with charges.
With inflation at 5% or more that means that the money is losing value.
But other options also have some risk/return profile.
What does he need the money for and when might be be likely to use it?
What's his age and general situation?


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