Thing is though, you know what you're getting in advance... you don't wait a year & *Surprise! No return / great return for you this year*. I can't switch CU when their rates change... because they don't advertise them
Credit Union Dividends
- Thread starter Lauralashes
- Start date
Thing is though, you know what you're getting in advance... you don't wait a year & *Surprise! No return / great return for you this year*. I can't switch CU when their rates change... because they don't advertise them
@catch22
You miss the point – my comparison with credit unions elsewhere was not on rates paid on deposits. Firstly consider your statement: “vast majority of credit unions are compliant, even with the new regulatory reserve ratio” – when initially published the 10% reserve ratio would have meant that over 180 would not have been able to pay a dividend (League figures) – that’s 35%. Regulatory estimates put the figure at over 220 or 52%. Forebearance will reduce this figure but its been reported that 50 credit unions won't pay a dividend this year which is 12%. If these 50 are in the top 150 or so then upwards of €4bn in savings will not attract a dividend - that's 33% of total savings held in credit unions - even if half of the 50 are in the top 150 it represents close to €2.8bn in savings. With ninety reported in 2008 as non-compliant with lending limits this is 21% or 45% of the top 200 given the rest barely lend any more.
While the regulatory reserve ratio is to be 10%, (introduced in part to prevent credit unions dipping into their reserves to pay dividends) - the generally accepted prudent ratio is c15%.
Uniquely Irish credit unions continue to fund loans using capital raised through ordinary share accounts. Dividends are paid from profits made from lending. Paying market rates refers to the successful credit union business model used in other countries where credit unions pay interest on deposits and charge interest on loans at market prices. They also provide a wider range of savings and loans products, current accounts, charge fees for their banking services and offer a wide range of third party products (insurances etc). Irish credit unions on the other hand continue to use a basic model first introduced in the 50’s and have made very little progress in expanding the products and services they offer.
The problem for Irish credit unions is they are very effective a gathering deposits but ineffective in making loans. Their basic business model which remains a start up phase (shares funding loans remunerated from profits) has been slowly degrading for some time. And their market share in consumer lending has been on the decline for the past ten years. Today most lend less than 50% of assets and far too many are well below this average figure. The financial performance benchmark is that loans should be a minimum of 70% of assets. As loan income declined and emphasising a high dividend rate (4% V market prices of <2%) they chased higher returns on their excess funds/investments- higher return meant higher risks – the result was an investment bubble that burst last year. The loan book of increasingly higher risk unsecured loans began to unravel as early as 2005 when over 70% reported loan delinquency well in excess of their own agreed minimum performance benchmark of 5% of loans. This year loan delinquency it seems will rise to 10% of loans which means a substantial increase in bad debt provisions and write offs. And with a cost income ratio of 80%+ there is little room to generate the profits required to cover loans and investment losses, pay dividends and build reserves. Whatever about investing in modern technologies.
It is correct to say they are inhibited by legislation that is designed to prudently control balance sheet risks of small credit institutions such as credit unions – but they are also inhibited by their own failure to advance the business case for greater flexibility. Mortgage origination wasn’t begun here until 2006: yet credit unions could have been active in the market since well before 1997. And could have developed the competence to provide mortgages off their own books.
In truth credit unions are self-inhibiting in developing the central systems, products and services they are permitted to provide under law. Their products and services (those within their control) remain the basic share and loan account. There is nothing in law preventing credit unions offering credit cards, basic bank current accounts, revolving credit, term deposits or a host of additional services. Some have started to offer third party insurances, etc but their fee income to total income ratio remains below 1% which is miles off where their peers are operating in the US, Canada and Australia.
Dividend payments have also been discussed on this thread:http://www.askaboutmoney.com/showthread.php?t=110386
You miss the point – my comparison with credit unions elsewhere was not on rates paid on deposits. Firstly consider your statement: “vast majority of credit unions are compliant, even with the new regulatory reserve ratio” – when initially published the 10% reserve ratio would have meant that over 180 would not have been able to pay a dividend (League figures) – that’s 35%. Regulatory estimates put the figure at over 220 or 52%. Forebearance will reduce this figure but its been reported that 50 credit unions won't pay a dividend this year which is 12%. If these 50 are in the top 150 or so then upwards of €4bn in savings will not attract a dividend - that's 33% of total savings held in credit unions - even if half of the 50 are in the top 150 it represents close to €2.8bn in savings. With ninety reported in 2008 as non-compliant with lending limits this is 21% or 45% of the top 200 given the rest barely lend any more.
While the regulatory reserve ratio is to be 10%, (introduced in part to prevent credit unions dipping into their reserves to pay dividends) - the generally accepted prudent ratio is c15%.
Uniquely Irish credit unions continue to fund loans using capital raised through ordinary share accounts. Dividends are paid from profits made from lending. Paying market rates refers to the successful credit union business model used in other countries where credit unions pay interest on deposits and charge interest on loans at market prices. They also provide a wider range of savings and loans products, current accounts, charge fees for their banking services and offer a wide range of third party products (insurances etc). Irish credit unions on the other hand continue to use a basic model first introduced in the 50’s and have made very little progress in expanding the products and services they offer.
The problem for Irish credit unions is they are very effective a gathering deposits but ineffective in making loans. Their basic business model which remains a start up phase (shares funding loans remunerated from profits) has been slowly degrading for some time. And their market share in consumer lending has been on the decline for the past ten years. Today most lend less than 50% of assets and far too many are well below this average figure. The financial performance benchmark is that loans should be a minimum of 70% of assets. As loan income declined and emphasising a high dividend rate (4% V market prices of <2%) they chased higher returns on their excess funds/investments- higher return meant higher risks – the result was an investment bubble that burst last year. The loan book of increasingly higher risk unsecured loans began to unravel as early as 2005 when over 70% reported loan delinquency well in excess of their own agreed minimum performance benchmark of 5% of loans. This year loan delinquency it seems will rise to 10% of loans which means a substantial increase in bad debt provisions and write offs. And with a cost income ratio of 80%+ there is little room to generate the profits required to cover loans and investment losses, pay dividends and build reserves. Whatever about investing in modern technologies.
It is correct to say they are inhibited by legislation that is designed to prudently control balance sheet risks of small credit institutions such as credit unions – but they are also inhibited by their own failure to advance the business case for greater flexibility. Mortgage origination wasn’t begun here until 2006: yet credit unions could have been active in the market since well before 1997. And could have developed the competence to provide mortgages off their own books.
In truth credit unions are self-inhibiting in developing the central systems, products and services they are permitted to provide under law. Their products and services (those within their control) remain the basic share and loan account. There is nothing in law preventing credit unions offering credit cards, basic bank current accounts, revolving credit, term deposits or a host of additional services. Some have started to offer third party insurances, etc but their fee income to total income ratio remains below 1% which is miles off where their peers are operating in the US, Canada and Australia.
Dividend payments have also been discussed on this thread:http://www.askaboutmoney.com/showthread.php?t=110386
Kaplan- now you're just making things up as you go along. Firstly you say 'Irish credit unions have never paid market prices for savings', then you say 'a high dividend rate (4% V market prices of <2%)'.
Credit unions most definitely are not permitted to offer credit cards, overdrafts or revolving credit and it is misleading to state otherwise. Sounds to me more like anti credit union propaganda than any serious point on credit union reform.
The regulatory reserve ratio IS 10%, not 'to be 10%'.
By the way, if the Yes vote in the Lisbon treaty had been 88%, I think we'd all agree that would be the 'vast majority'.
The credit union representative bodies are not showing great leadership and should be strongly advocating modernisation and reform of the movement. There is a great opportunity for credit unions now to offer a real alternative to the corrupt and broken banking system.
500 credit unions is simply too many and ILCU and CUDA should be showing leadership by encouraging credit unions to merge and rationalise in order to gain from economies of scale and in order to be able to offer more services on an economic basis.
One hopes that the review of credit unions ordered by the Minister for Finance will consider introducing long needed reforms, but I suspect that the review is not being done in the best interests of credit unions, but for the benefit of other vested interests.
Credit unions most definitely are not permitted to offer credit cards, overdrafts or revolving credit and it is misleading to state otherwise. Sounds to me more like anti credit union propaganda than any serious point on credit union reform.
The regulatory reserve ratio IS 10%, not 'to be 10%'.
By the way, if the Yes vote in the Lisbon treaty had been 88%, I think we'd all agree that would be the 'vast majority'.
The credit union representative bodies are not showing great leadership and should be strongly advocating modernisation and reform of the movement. There is a great opportunity for credit unions now to offer a real alternative to the corrupt and broken banking system.
500 credit unions is simply too many and ILCU and CUDA should be showing leadership by encouraging credit unions to merge and rationalise in order to gain from economies of scale and in order to be able to offer more services on an economic basis.
One hopes that the review of credit unions ordered by the Minister for Finance will consider introducing long needed reforms, but I suspect that the review is not being done in the best interests of credit unions, but for the benefit of other vested interests.
@Catch22
We may well be on the same page: but first some clarifications:
Boom time dividends were as high as 4% when market prices were far less than 2% - if you consider the share account as similar to a demand deposit then both duration and price inelasticity is important to understand in pricing the rate to be paid. Which is a technical way of saying credit union dividends were far too high – had they been competing at market prices using diversified products (demand/term/time deposits) then they would have paid far less and still managed to attract and hold savings – and they also benefit from favourable tax treatment (Non-Dirt) share accounts in which over 80% of all savings are held. The dividend maximisation strategy prevented considering alternative pricing.
“There is nothing in law preventing credit unions offering credit cards, basic bank current accounts, revolving credit, term deposits or a host of additional services.” This is a correct statement – regulatory authorities could approve these products which of course can be offered through third party alliances (e.g. UK credit unions/Co-OP Bank current account)
There are 419 (not 500) registered credit unions – ranging from 500k to over 370m in assets – far too many – rationalisation is required if credit unions are to achieve both scale and scope efficiencies – many think the number should be about 100 or so with the balance becoming satellites – but merging isn’t a silver bullet as the system hasn’t the corporate resources to develop scale and scope efficiencies. This is why credit unions in other countries own central organisations that provide the wherewithal to achieve operational efficiency, diversify products and access wholesale money markets etc.
Trade bodies ILCU/CUDA have promoted rationalisation but it’s a lucky bag version offering many differing flavours from local marketing to full blown mergers – ILCU is incapable of leading as it does not have the power and influence it pretends to have and CUDA is far too small.
Credit unions could offer ordinary people a viable alternative to the commercial high street banking. But they have proven they cannot reform from within – if they could they would have be now. With luck the Ministerial review may galvanize him into taking action and put a structure in place to drive through reforms. That is if he considers the sector to be of systemic importance.
We may well be on the same page: but first some clarifications:
Boom time dividends were as high as 4% when market prices were far less than 2% - if you consider the share account as similar to a demand deposit then both duration and price inelasticity is important to understand in pricing the rate to be paid. Which is a technical way of saying credit union dividends were far too high – had they been competing at market prices using diversified products (demand/term/time deposits) then they would have paid far less and still managed to attract and hold savings – and they also benefit from favourable tax treatment (Non-Dirt) share accounts in which over 80% of all savings are held. The dividend maximisation strategy prevented considering alternative pricing.
“There is nothing in law preventing credit unions offering credit cards, basic bank current accounts, revolving credit, term deposits or a host of additional services.” This is a correct statement – regulatory authorities could approve these products which of course can be offered through third party alliances (e.g. UK credit unions/Co-OP Bank current account)
There are 419 (not 500) registered credit unions – ranging from 500k to over 370m in assets – far too many – rationalisation is required if credit unions are to achieve both scale and scope efficiencies – many think the number should be about 100 or so with the balance becoming satellites – but merging isn’t a silver bullet as the system hasn’t the corporate resources to develop scale and scope efficiencies. This is why credit unions in other countries own central organisations that provide the wherewithal to achieve operational efficiency, diversify products and access wholesale money markets etc.
Trade bodies ILCU/CUDA have promoted rationalisation but it’s a lucky bag version offering many differing flavours from local marketing to full blown mergers – ILCU is incapable of leading as it does not have the power and influence it pretends to have and CUDA is far too small.
Credit unions could offer ordinary people a viable alternative to the commercial high street banking. But they have proven they cannot reform from within – if they could they would have be now. With luck the Ministerial review may galvanize him into taking action and put a structure in place to drive through reforms. That is if he considers the sector to be of systemic importance.