CU introduces cap on members shares

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Ash

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My credit union has introduced a cap on members' shares. Anyone currently with shares above this maximum have been told that no further deposits will be accepted and have been advised to remove any deposits above the maximum out of the credit union.

I am fortunate enough not to have a loan at the moment and to have accumulated shares over many years. But now my shares are above the new ceiling, and my salary is paid in monthly, increasing my shares (on a good month). In recent time my contact with banks have been minimal (mainly credit card a/c) and I am loathe to remove money to them given everything that has happened.

I was very happy with the credit union, it was a financial system which suited my simple needs. But I feel this move is against the spirit and ethos of credit unions.

Is this cap on shares common in credit unions? I must admit I do not know if a previous, higher cap - which did not include me - existed in the CU. Do members have to abide by this new ruling? Is there an alternative? Ideally I would like to let things stay as they are.
 
Whats the reasoning behind a cap on members shares ? You only get one vote at the AGM no matter how many shares/money you have deposited anyway. Surely they want to keep as much cash as possible and not force people to withdraw it ? This doesnt make any sense to me.
 
The reasoning for the cap is that most Credit Unions have far more members' funds than demand for loans, so they end up putting the excess on deposit at low rates of interest. That pulls down the earnings rate, and is one of the reasons why CUs have been paying low dividends.
 
The whole world has gone mad. I've never heard that a CU won't allow people to save, how ridiculous is that.

On another note we are being told people can't get loans from anybody, and that credit unions are not allowed to loan, and now we hear that people are not applying for loans.

Ash probably it's time for you to open an account with another credit union. Also could you tell us what is the limit in your credit union.
 
Ash said:
Is this cap on shares common in credit unions? I must admit I do not know if a previous, higher cap - which did not include me - existed in the CU. Do members have to abide by this new ruling? Is there an alternative? Ideally I would like to let things stay as they are.
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I wouldn't say it is common but we did it a few years ago. The rationale is that credit unions are required to hold an amount equivalent to 10% of savings in a statutory reserve. This reserve comes from surpluses year on year. When the Euro currency came in in January 2002, there was a huge influx of funds into CUs. This puts pressure on CUs to earn surplus with diminishing investment returns and falling loans plus greater bad debt provisions.

I would suggest you pull out some funds and deposit them with An Post, EBS or some other term deposit that will probably earn you more than the CU.

Incidentally, when we did it we allowed existing funds to remain in situ indefinitely but would not allow any further increases. Slim

Note: I am a director of the CU.
 
my wifes CU in Dublin has a 50k share limit for a few years now and I think last years dividend was 2%. I am in another CU, but I don't know of any limit there as I am nowhere near 50k in shares.
 
ClubMan said:
Looks like the policy varies from CU to CU alright.
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Should this limit have been notified to people when they opened their account? My own credit union hasn't ever mentioned it.

Sorry to go slightly off-topic but several of those google results say that your shares are protected under the Savings Protection Scheme up to a max of €12700 in all credit unions participating in the Scheme. This is the first I have heard of this, does this mean that any savings I have in excess of that limit are unprotected? Or if my credit union doesn't participate in the Scheme that none of my savings are protected. Confused now.
 
Leaky1 said:
Should this limit have been notified to people when they opened their account? My own credit union hasn't ever mentioned it.

Sorry to go slightly off-topic but several of those google results say that your shares are protected under the Savings Protection Scheme up to a max of €12700 in all credit unions participating in the Scheme. This is the first I have heard of this, does this mean that any savings I have in excess of that limit are unprotected? Or if my credit union doesn't participate in the Scheme that none of my savings are protected. Confused now.
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In my credit union theres also supposed to be life insurance insurance on shares deposited depending on the age you were when you deposited. Something like 3 times deposits under 30 years of age , 2 times if you deposited when over 30 years of age etc. I have no idea who pays for this either if not the credit union.
 
Leaky1 said:
Should this limit have been notified to people when they opened their account? My own credit union hasn't ever mentioned it.

Sorry to go slightly off-topic but several of those google results say that your shares are protected under the Savings Protection Scheme up to a max of €12700 in all credit unions participating in the Scheme. This is the first I have heard of this, does this mean that any savings I have in excess of that limit are unprotected? Or if my credit union doesn't participate in the Scheme that none of my savings are protected. Confused now.
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That figure is out of date. All credit union savings are protected to a maximum of €100,000 per member under the Deposit Guarantee Scheme. The Savings Protection Scheme is a very controversial issue in the credit union movement. It is primarily used to guarantee and underpin the operations of credit unions that may be in difficulty. The deposit guarantee scheme would only kick in if a ctredit union is wound up.

Each CU is autonomous within the terms of the Rules and Act. Each can set a maximum savings limit or none. They certainly should inform members on joining.
 
Slim said:
Each CU is autonomous within the terms of the Rules and Act. Each can set a maximum savings limit or none. They certainly should inform members on joining.
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As a matter of course do they give new members a rules booklet? Whether or not most people actually read it is another matter...
 
ClubMan said:
As a matter of course do they give new members a rules booklet? Whether or not most people actually read it is another matter...
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Most CU's do not offer a rulebook to new members. There is definitely a democratic deficit in our member owned credit unions with most members assuming that we are all branches of a central entity. I think it suits some CU activists that members are ignorant of the workings of their CU. A CU with 20,000 members might only get 200 at the AGM and a significant proportion of the 200 would be existing board members, staff, their families and friends!
 
Capping shares/deposits is for balance sheet management as is limiting lending amounts.

A credit union, just like a bank, must maintain capital buffers -reserves. The minimum level of reserves is regulated by the Central Bank and set at this time at 10% of total assets. Assets are made up of loans and investments backed by (funded by) shares & deposits (liabilities). If the level of funding increases then the credit union lends or invest these funds to generate a return which if higher than the cost of running the business is used to (a) maintain reserves at the 10% and (b) fund investments in infrastructure and (c) pay a dividend. Right now many credit unions are just about managing to fund (a) - some are not.

If savings increase then this leads to an increase in assets which means the credit union must generate enough profit to fund the increase in reserves. For example a credit union has €50m in assets and reserves of €5m (10%). If it takes in €5m in savings its assets will increase to €55m. It must now have €5.5m in reserves.

The problem for many is they are finding it difficult to maintain the 10% reserve ratio - and as they cannot generate the profits needed they are shrinking the balance sheet -hence deposit and lending limits.
 
kaplan said:
Capping shares/deposits is for balance sheet management as is limiting lending amounts.

A credit union, just like a bank, must maintain capital buffers -reserves. The minimum level of reserves is regulated by the Central Bank and set at this time at 10% of total assets. Assets are made up of loans and investments backed by (funded by) shares & deposits (liabilities). If the level of funding increases then the credit union lends or invest these funds to generate a return which if higher than the cost of running the business is used to (a) maintain reserves at the 10% and (b) fund investments in infrastructure and (c) pay a dividend. Right now many credit unions are just about managing to fund (a) - some are not.

If savings increase then this leads to an increase in assets which means the credit union must generate enough profit to fund the increase in reserves. For example a credit union has €50m in assets and reserves of €5m (10%). If it takes in €5m in savings its assets will increase to €55m. It must now have €5.5m in reserves.

The problem for many is they are finding it difficult to maintain the 10% reserve ratio - and as they cannot generate the profits needed they are shrinking the balance sheet -hence deposit and lending limits.
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You seem to ignore the fact that the reserve requirement is totally inappropriate and unrealistic for new funds coming into the credit union.
E.g. member lodges €50K new funds into the CU. Ceteris paribus this means the CU must provide €5K in new reserves, despite (a) its impossible to make €5K return on the €50K lodged in the year lodges and (b) the complete lack of risk weighting for what the CU does with the €50K - the CU might put the €50K in a capital guaranteed deposit a/c with no risk to the funds deposited - no need for €5K buffer.
Your thoughts on this specific example?
 
@CUManager
My post dealt with why credit unions were capping shares not the 10% reserve requirement which the regulatory minimum. Well run credit unions should of course plan for higher levels to provide the headroom for growth.
 
CU Manager said:
You seem to ignore the fact that the reserve requirement is totally inappropriate and unrealistic for new funds coming into the credit union.
E.g. member lodges €50K new funds into the CU. Ceteris paribus this means the CU must provide €5K in new reserves, despite (a) its impossible to make €5K return on the €50K lodged in the year lodges and (b) the complete lack of risk weighting for what the CU does with the €50K - the CU might put the €50K in a capital guaranteed deposit a/c with no risk to the funds deposited - no need for €5K buffer.
Your thoughts on this specific example?
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Your question on capital allocation illustrates everything that is wrong with Irish credit unionism. The idea of taking in funds from the public to then place them on deposit with a bank is to say that “credit” unions are “savings” unions that might lend some of their money. Which is of course why they are in trouble – they are running the business as a quasi investment club for savers.

The answer lies in one word CREDIT. A credit unions’ legal, economic and societal objective -the reason why it exists - is to make loans from household savings. Its loan to deposit ratio should be over 80%. But in this country only 45% of retail funds were used to make loans. The balance was invested in other financial institutions and the stock and bond markets.

No where else on the planet has the credit co-operative model been subverted in the way it has here in Ireland.

This is why Irish credit union’s directors and managers have undermined the financial stability of the business they were responsible for and have exposed savers funds to an imprudent level of risk. Stuck as they cannot unwind safely from years of stupidity, they are blaming everyone else for the problems they are singularly responsible for creating.
 
@Kaplan - the thread is about cu's putting a cap on shares. The barmy blanket 10% reserve is a very relevant issue providing context for savings caps.
My example of new cash coming into a CU and being placed on deposit was to highlight the stupidity of a blanket reserve requirement that is not risk weighted. The same scenario exists for "within shares/secured" loans - the reserve requirement is out of kilter with the underlying risk and therefore a CU is not "rewarded" for minimising risk.
Of course, instead of debating this point, you instead jump on yet another tirade of negativity. Using terms like "years of stupidity" to describe how CU's have been run, is just out-of-context opportunism to further your anti-credit union agenda.
The context being that all the domestic banks and building societies going bust and being bailed out.
Again I must remind you that the collapse of the financial ecosystem was a failure of the political and regulatory establishment in Ireland. You appear to be prepared to consider the recession, unemployment and the effective bankruptcy of our country to be inconsequential - i.e. that CU's brought everything upon themselves!
Try to be objective please and comment on the non risk weighted reserve requirement!
 
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