10% Reserve Ratio

Jim2007

Frequent Poster
Messages
2,155
What I am trying to say is find any Bank in the world that has reserves of 10% of Total Assets and the answer will be ZERO.
That is the issue. Continue down the line 9, 8, 7 , and its still NIL ZERO ZILCH

The way the CBI have used this ratio is based on a fundamental deliberate deception.
You have not got the foggiest idea of what you are talking about.
 

county

Frequent Poster
Messages
32
There doesn't appear to be any science behind the calculation of the 10% ratio and it doesn't differentiate between a credit union lending and investing in riskier assets as opposed to a credit union involved in less riskier activities.
It is a poor reflection of our governing institutions when the owners of a credit union (its members) are prevented from placing their own monies with it because of a capital ratio % that appears to have been pulled out of a hat.
 

WizardDr

Frequent Poster
Messages
1,232
Hi Jim2007

Assume a Credit Union reserve is at exactly 10% of its assets.

It is the beneficiary of €1m from a Mr Brendan Burgess a well known consumer advocate who signs it over as a philanthropist.

That Credit Unions assets rise by €1m. It breaks even precisely and it cannot lend.

It still must find €100,000 in actual reserves as the definition is so narrow of 'capital' that only retained profits can count.

It will have to return the gift.

Now simply translate this to Shares with the same facts.

Then ask any Credit Union why they either paid back shares on a compulsory basis or capped the shares.


Gradual extinction by the hand of CBI who think they are doing God's work.
 

24601

Frequent Poster
Messages
216
The credit union business model in Ireland is deeply flawed and the issues raised by Brendan are fair albeit lacking the nuance an understanding of the membership profile of credit unions.
Hi Jim2007

Assume a Credit Union reserve is at exactly 10% of its assets.

It is the beneficiary of €1m from a Mr Brendan Burgess a well known consumer advocate who signs it over as a philanthropist.

That Credit Unions assets rise by €1m. It breaks even precisely and it cannot lend.

It still must find €100,000 in actual reserves as the definition is so narrow of 'capital' that only retained profits can count.

It will have to return the gift.

Now simply translate this to Shares with the same facts.

Then ask any Credit Union why they either paid back shares on a compulsory basis or capped the shares.


Gradual extinction by the hand of CBI who think they are doing God's work.
Except that a gift from a philanthropist would be booked as income and not accounted for on the balance sheet. Indeed, that credit union's reserves would rise significantly in such a scenario assuming it doesn't distribute the windfall back to members. I get what you're saying though.

In any event, I agree that the 10% requirement is too rigid, and is especially high given the risk profile of a typical Irish credit union. The composition of their collective investment portfolios and the relative improvement in loan book quality in recent years renders such a high, static requirement at odds with what is a fairly simple business model. Most of the reserve requirement flows from savings that are ultimately held in cash or put on deposit in Irish banks, with the balance put into very restrictive, low risk products. That being said, whether the requirement is 10% or ~8%, the underlying issue is that the business model doesn't work. With the exception of a few industrial credit unions, pretty much every credit union can only lend out 15 - 30% of their assets, and that isn't some recent phenomenon.

Credit Unions are facing into a period of huge uncertainty. Lending volumes will contract massively in 2021. Loan repayments for existing loans will increase. Consequently loan books will start dropping like a stone next year. Arrears will also increase with a huge draw on the bottom line to fund the required increases in bad debt provisions. Savings will probably continue to rise and yields on deposits and investments are trending negative. Lets not even mention Brexit.

Boards of credit unions can't sit on their hands hoping to be saved by the Central Bank or politicians, they need to act now, and a very simple strategy is to introduce a very low cap on savings to offset the capital risk. They should be doing this regardless of what the reserve requirement is. Hand people back their money if you can't do anything with it! Some of them won't thank you for it but it's very likely that they were never going to borrow from you anyway!
 

NoRegretsCoyote

Frequent Poster
Messages
1,678
Hand people back their money if you can't do anything with it!
How do you hand back money to people whose only account is with a credit union?

"Dear member. We no longer need your money. Please turn up on Tuesday morning and we will give you €10,000 in cash."

There are tens if not hundreds of thousands of adults in Ireland who do not have an account with a bank, and do with a credit union.
 

24601

Frequent Poster
Messages
216
How do you hand back money to people whose only account is with a credit union?

"Dear member. We no longer need your money. Please turn up on Tuesday morning and we will give you €10,000 in cash."

There are tens if not hundreds of thousands of adults in Ireland who do not have an account with a bank, and do with a credit union.
Well, you don't. But the vast majority of credit union members have a bank account so they'd capture most people. Depending on how aggressively they want to implement the cap they can just write a cheque and leave members figure it out, but most are making an allowance for the genuinely unbanked.

If it's a choice between protecting the viability of the credit union and facilitating a small % members with larger saving balances it seems reasonable to inconvenience the "large" savers. It really is quite easy for them to open a current account.
 

WizardDr

Frequent Poster
Messages
1,232
The credit union business model in Ireland is deeply flawed and the issues raised by Brendan are fair albeit lacking the nuance an understanding of the membership profile of credit unions.


Except that a gift from a philanthropist would be booked as income and not accounted for on the balance sheet. Indeed, that credit union's reserves would rise significantly in such a scenario assuming it doesn't distribute the windfall back to members. I get what you're saying though.

In any event, I agree that the 10% requirement is too rigid, and is especially high given the risk profile of a typical Irish credit union. The composition of their collective investment portfolios and the relative improvement in loan book quality in recent years renders such a high, static requirement at odds with what is a fairly simple business model. Most of the reserve requirement flows from savings that are ultimately held in cash or put on deposit in Irish banks, with the balance put into very restrictive, low risk products. That being said, whether the requirement is 10% or ~8%, the underlying issue is that the business model doesn't work. With the exception of a few industrial credit unions, pretty much every credit union can only lend out 15 - 30% of their assets, and that isn't some recent phenomenon.

Credit Unions are facing into a period of huge uncertainty. Lending volumes will contract massively in 2021. Loan repayments for existing loans will increase. Consequently loan books will start dropping like a stone next year. Arrears will also increase with a huge draw on the bottom line to fund the required increases in bad debt provisions. Savings will probably continue to rise and yields on deposits and investments are trending negative. Lets not even mention Brexit.

Boards of credit unions can't sit on their hands hoping to be saved by the Central Bank or politicians, they need to act now, and a very simple strategy is to introduce a very low cap on savings to offset the capital risk. They should be doing this regardless of what the reserve requirement is. Hand people back their money if you can't do anything with it! Some of them won't thank you for it but it's very likely that they were never going to borrow from you anyway!
Debit Bank
Credit Income.

The receipt of the money increases assets - that is my point,
 

Pinoy adventure

Registered User
Messages
153
Well, you don't. But the vast majority of credit union members have a bank account so they'd capture most people. Depending on how aggressively they want to implement the cap they can just write a cheque and leave members figure it out, but most are making an allowance for the genuinely unbanked.

If it's a choice between protecting the viability of the credit union and facilitating a small % members with larger saving balances it seems reasonable to inconvenience the "large" savers. It really is quite easy for them to open a current account.

Them large savers who do open a current account may think twice once they see the bank fees coming out each month or quarter
 
Top