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

@CUManager - WOCCU's benchmark capital ratio is 15% and if memory serves me right ILCU's target was 10% at one time. Of course a credit union can grow and maintain reserves at 10% but it will take consolidation and a modernised operational model to achieve this target. It's also highly likely that tax-payers money will be used to capitalise credit unions - which should unlock a latent capacity to act as proper savings and loans institutions.

@ CUManager. What would you see as a reasonable reserve requirement and how would it work? You appear to be arguing for risk weighting in the belief it will result in lower levels of capital. How may CU Managers could be trusted to apply a risk weighting system and how many CU's would have the operational capacity to make it work without the need for intrusive regulatory intervention? It's probably the case that once consolidated larger better capitalised credit unions may be required to adopt a risk weighted approach.

Capital reserves are simply a buffer against insolvency.

The reserve requirement would be risk based and the level would obviously vary from CU to CU depending on the risk profile of the CU's assets.
Issues such as loan rescheduling could rightly effect reserve requirements instead of the current absurd requirements of expense provisioning for such rescheduled loans.

I would also see general loan arrears affecting reserve requirements. Current expense provisioning would remain with underperforming loans having a direct impact on reserve requirements.

@CUManager: It appears you are conflating loan loss provisions with capital reserves. The former recognises lending risks - the probability of losses and the latter the overall risk profile of the business including strategic, credit, investment and operational risk. I note you haven't addressed what you consider an adequate level of capital save to argue for "risk weighting" - which seems to be an argument to reduce levels of capital. Nor have you addressed the WOCCU recommended prudential standard of a minima of 15% to total asset (a leverage ratio).

It's fair to say that the majority of credit unions would not have the professional competence or organisational resources to apply a weighting system at this time. It's also the case that weightings would reflect the overall undiversified scenario and on balance would result in the same level of capital as required today.

It's well recognised that public confidence and trust are dependent on well capitalised credit institutions, which is why internationally it is now recognised that levels thought prudent in the past were too low. Hence the drive to increase capital requirements and introduce leverage ratios to compliment RWA's . It's also the case that credit unions elsewhere that are subject to more robust regulation and supervision regimes have significantly higher capital reserves than here.

Similarly loan loss provisioning which is quite a separate concept to capitalisation requires credit unions to adequately provide for the probability of losses including those associated with modified loans over the life of these assets.

To suggest as you are that 409 credit unions should be free to decide what level of capital and bad debts they should provide for within what would be a principles based regulatory system swims against the tide and is an unreasonable proposition given the relative maturity of their operating model,standards of professionalism and specialisation and instability circumstances credit unions have traded themselves into.

kaplan said:

@CUManager: To suggest as you are that 409 credit unions should be free to decide what level of capital and bad debts they should provide for within what would be a principles based regulatory system swims against the tide and is an unreasonable proposition given the relative maturity of their operating model,standards of professionalism and specialisation and instability circumstances credit unions have traded themselves into.

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I did not suggest CU's would be free to decide at all. I simply said that capital requirements should be measured against risk. I gave a rough idea of what I was talking about on a practical level of measuring risk on the riskiest asset on the balance sheet - the loan book.
Anyone can advocate for higher capital positions - its the easy and lazy position to take.
The reality is that such capital must be raised through earnings. Increasing capital reserve requirements is certain to lead to increased loan interest rates - which is obviously not in the members best interests.

It is completely unfair to say "...that that the majority of credit unions would not have the professional competence or organisational resources to apply a weighting system at this time."
What do you base this on? Where are you getting your knowledge of individual CU's - or is this more generalisations and unfounded sweeping statements designed to further your anti credit union stance?

There are approx 400 CU's in the ROI. I am an industry insider and even I do not have the personal knowledge of the Boards and Managers that Kaplan seems to think he has!

@CUManager: We may have a better discussion if you would desist from ad hominem attacks and uninformed, incorrect attribution of motive. Why not address the substantive issue you raised in criticising current capital adequacy requirements.

There are those of us who can distinguish between the credit union as a systemically important part of the future of the banking sector and the way in which credit unions are governed and managed. This quote from the most recent regulatory speech on credit unions captures the essence of the issue:

"It might be convenient to put the stresses now evident in many credit unions down to the difficult macro-economic environment we are now experiencing and there is much truth in that. However, this is only partly the reason. For those increasing number of credit unions who now find themselves in financial difficulty there is a recurring trend – they have been poorly governed by boards and management and effective oversight by the supervisory committees has been non-existent.

Many of the poor governance practices have come about in part due to the current loose legislative framework in place for the prudential oversight of the sector, but also because of the general poor compliance culture built up in many credit unions over the years.

It is pleasing, however, to see attitudes to compliance changing. Those directors and managers who have consciously upgraded policies, processes and controls in recognition of the ‘job to be done’ are to be commended. In order to build on this we now see the immediate introduction of statutory requirements in relation to governance and competency as being vitally important in putting a clear framework in place in relation to responsibility and accountability.

An appropriate fitness and probity regime for the credit union sector will help to strengthen governance and ultimately enable prudent development into other areas of business. We have asked the Department of Finance to commence the fitness and probity provisions contained in the Central Bank Reform Act 2010 for credit unions and will be bringing forward proposals to credit unions in this regard shortly."

so you are relying on a speech from the Registrar to make such generalisations rather than your own knowledge?
The regulator was referring to the samll minority of CU's who got into financial difficulty but you see fit to tar 400 odd CU's with the same brush!