300/409 registered CU's have had their lending inhibited by their regulator.

K

kaplan

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Today's report in the Indo on the scale of regulatory intervention indicates a worsening credit union financial stability profile. It appears that 300 of the 409 registered credit unions have had their lending inhibited by their regulator. This figure correlates with sectors [broken link removed]

One always has to treat credit union representative comments with a grain of salt as they exaggerate to make the point - still if good borrowers are being turned away it means that that financial fragility is worsening as expected.

Could it be that the scale of rationalisation/consolidation will see the network of 409 being shrunk fit to 100 or so? Inhibiting lending is no doubt being used to ensure balance sheet risk is controlled for.
 
Care to tell us if you are connected with irishcuvoice.com? I tend to be suspicious of links to sites where the owners identity is concealed even from a whois lookup.
 
A further development since the clipped wing story has seen Enda Kenny come out in support of the Central Bank's regulation and supervision of credit unions. If credit union trade associations think political lobbying, grass roots agitation, PR rhetoric and hyberole will somehow magic away serious sectoral instablity problems they got their message from Government's most senior member. Credit unionist PR spin on lending limit restrictions should be challenged - why have the limits been imposed would be a good start at getting to the heart of the matter.
 
More regulation is not necessarily good regulation.

Sometimes, the Regulator is protecting himself as in 'if it goes wrong, look at all the restrictions, capital requirements we had in place and it still went wrong', when it could actually be the onerous levels of regulation that will drive a credit union under.

For example, putting a limit of €10,000 on any loan to a member takes absolutely no account of that member's ability to repay, credit history, personal circumstances etc. but is easy to monitor, so it suits the Regulator. The same member then todldes off to the bank and is never seen in the credit union again.
These blanket restrictions are anti competitive and should be challenged in court.
 
If you prevent a business from trading to its potential them you destroy the ability to trade profitably. Considering that the regulator wants less credit unions in the county isn't this an easy way to start the reduction by destroying their income generative capacity. It might sound cynical but considering what has gone on behind closed doors in the regulators office/CB to date one has to be.
 
Padraigb said:
Care to tell us if you are connected with irishcuvoice.com? I tend to be suspicious of links to sites where the owners identity is concealed even from a whois lookup.
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Rumour has it that the site in question is run by a person whose name rhymes with silly cobbs!
 
Please address Kaplan's substantive points and refrain from personalised comments and idle off topic speculation.

Title edited to reflect discussion.

aj
moderator
 
@CUManager - Thought I'd cut and paste the blog posting below. You wouldn't by any chance be one of the 70% who had their wings clipped?

"If 70% of credit unions have had their lending wings clipped by their regulator then system instability is worsening.

Continuing with their policy of abject denial, representative bodies are blaming system instability on regulatory intervention. Such rhetoric, rooted in volunteer victimisation, deflects from the underlying reason why lending is being inhibited.

Credit union problems are made up of avoidable internal causations.

Two external forces acted as system destabilisers.

The first took effect in 2007-2008 as asset values plummeted and credit union investments took a hammering.

This was an inevitable consequence of highly imprudent investments in risk instruments no credit union should ever have undertaken. It must be remembered that ILCU promoted the strategy, defended it and frustrated regulatory attempts to roll back on risk taking. It is also the case that naïve financially unsophisticated directors and managers negligently exposed credit unions to imprudent investment risk.

The second external impact took effect as the economic recession took off and loan impairments escalated.

But well before 2008, credit union bad loans and poor lending practices had been exposed. Throughout the naughties as better risk borrowers shopped elsewhere for credit, credit union loan portfolios skewed towards higher risk borrowers. As early as 2006 problems emerged when the scale of bad debts was exposed in ILCU’s rationalisation report. While loan delinquency was far higher than would have been expected at the stage of the economic cycle, it was obvious the scale was underestimated and not being translated into bad debt provisions. Manipulating provisions to maintain dividend payout rates, credit unions were storing up a problem and entered 2008 without the provisioning or reserve cushion needed to withstand a wave of recessionary loan impairments. Their response was to engage in extend and pretend loan rescheduling as customer demand for new loans plummeted.

While credit unions would not have been immune to the impact of these twin external forces, these were amplified by internal factors:

  • High cost, low value operating model
  • Total reliance on interest and investment income
  • Imprudent lending to business and developers
  • Exposure to first timer affordability risk
  • Inadequate reserving policy that took little if any account of risk
  • Dividend policy to maximise payouts at the expense of reserves and provisions

These can be summarised as evidence of two underlying internal forces

Poor governance
Bad management

The regulatory response has been:

Restrict investment risk – inhibit risk taking and unwind imprudent risk positions
Regulatory Reserve Requirement - build capital buffers and prevent boards raiding reserves to fund dividend
Rescheduling provisions – permitting lending flexibility while ensuring appropriate risk provisions
Lending Limits – indicative of a worsening fragility profile and concern for credit risk practices and behaviours

The bottom line is this: If 70% of credit unions are having their lending wings clipped it means that they are considered too financially fragile to continue as viable independent entities. It matters little that they have excess funds to lend as pouring petrol on a fire does not put it out."
 
This is all very confusing, we have been told that credit unions are refusing deposits, have customers wanting to borrow and able to afford same but lending is restricted. None of this makes sense.
 
@Kaplan: No, our CU has no restrictions (yet!) so I guess we are one of the 109 or so in the clear for now. As I have answered your question then, quid pro quo, answer this please: do you have any association with the blog you keep referring to?
 
Bronte said:
This is all very confusing, we have been told that credit unions are refusing deposits, have customers wanting to borrow and able to afford same but lending is restricted. None of this makes sense.
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Many credit unions are limiting total savings, usually to quite a high threshhld, e.g. 50 or 60k. This is to avoid a situation where they are obliged to add to the reserves 10% of all savings. That reserve is built up out of hard pressed surpluses. CUs are set up for the ordinary punter, not high worth individuals. Also, CUs now have to be a lot more careful in lending so as not to lend to members who will only get into trouble. This, together with tighter regulation and falling demand for loans, means that CU loan books are falling and pressure is greater on investment income and on annual dividend.

Many credit unions have behaved in a dreadful manner over the early and good years. Their pigeons are coming home to roost bigtime and creating the current problems. Many credit unions who behaved prudently are also experiencing difficulty. The Regulator will be merciless in the next few years.
 
Slim said:
Many credit unions have behaved in a dreadful manner over the early and good years. Their pigeons are coming home to roost bigtime and creating the current problems. Many credit unions who behaved prudently are also experiencing difficulty. The Regulator will be merciless in the next few years.
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I dont necessarily agree with your opinion above. Very few CU's behaved in a dreadful manner.
Most CU's which are now identified as being in trouble, are victims of teh abject failure of the central bank/financial regulator to manage systemic risk in the wider financial services industry.
CU's lent to individuals as "going concerns" assuming that they would stay employed when all the while, those charged with ensuring a sound, stable and sustainable financial and economic ecosystem were asleep at the wheel.
Prof Kinsella hit the nail on the head - a "bail in" for struggling CU's is what is required. Its absolutely disingenuous to accuse most/many CU's of behaving dreadfully.
 
@slim I agree, dominated by small cliques and managers, local boards squandered hundreds of millions in community capital – capital that’s badly needed today. “Well meaning amateurs” was the phrase used by the regulator to describe a systemic leadership and governance failure, unique to the Irish credit union movement.

@CUManager ; excusing governance failure by blaming an "ecosystem" might win you plaudits with your pals around the local board table but not here. Seems that regulator bashing is the order of the day for you guys in advance of having to explain yourselves at AGM's. Interesting combined PR spin approach adopted by ILCU & CUMA - probably has nothing to do with the working relationship between the individuals mentioned in the article though.

Kinsella was probably talking about bailing in the sector - not bailing out incompetent boards and managers.
 
@Kaplan. I dont know how the representative bodies work to be honest - perhaps you have some experience with one of them?

I didnt excuse poor governance at all, you seem incapable of accepting the fact that much of the delinquency now experienced in CU's has resulted from systemic failures of regulation as well as fiscal failings. I am no fan of Mount St but the real culprits can be found in Dame St and Kildare St!
And singing the praises of a regulator who imposes capital requirements of 10% of assets without risk weighting is barmy to say the least especially in the context of CU's being unable to raise capital for reserves except from retained earnings.
Current CU regulation is heavy handed and deliberately fashioned to ensure CU's can't afford to grow their assets from intake of new cash while ensuring that existing cash cant be lent by imposing restrictions.
The aim is to force a collective reduction in the movement wide Balance Sheet akin to balance sheet reductions ordered on the reckless bailed out banks.
Your sweeping generalisations regarding CU Boards and in particular, management, is most unwelcome and unjustified
 
CUManager - you are right without knowing it. The problem is with reserves - credit unions didn't set enough aside nor did they provide properly for bad debts and when now asked to do so the business model ain't working. But lowering the capital ratio to allow growth won't work. I suspect that we will see mergers with post-merger stabilisation funding used to support those credit unions that can grow safely.
 
Kaplan - how insightful of you to propheticise what has been already leaked in numerous newspapers. Your assertion that I am right without knowing it is insulting and wrong - I would question your knowledge of the sector - no CU will be in a position to grow safely if they are required to put 10% of assets into reserve and fund such reserves from retained earnings, indeed no entity is sustainable with such constraints.
Lending is a risky business, most CU's have managed that risk quite well. The regulator is now over regulating the sector with lazy rules designed to make growth in the sector impossible and putting question marks on viability by setting unnecessarily high buffers. Any CU with adequate provisioning of impaired loans does not need a further 10% of total assets as a capital reserve - its unsustainable and unnecessary. It may indeed be counter intuitive as it will force CU's to take risks chasing higher returns to fund reserve requirements. Such risk taking could, of course, be discouraged by a risk weighted reserve requirement!
 
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