CU introduces cap on members shares

@CUManager: The problem is not the reserve requirement level at 10% - the problem lies with the introduction of the risk based capital standard itself. Once this was done it placed the legal entity of the credit union as a stakeholder smack bang in the middle of the board table and forced directors and managers to consider the long term sustainability of the business. Until then the business was run predominantly for saver's benefit through the dividend distribution model that focusses on year end performance and dividend declarations at AGM's.
 
@CUManager: Regulators will adopt a conservative approach to capital and credit institutions a less conservative approach. You are attacking the regulator for being lazy etc yet when asked what you consider to be an adequate level of capital you haven't responded. Rather than attacking why not try and state your case and support it with relevant argument ?
 
I do not attack, please refrainfrom using such provocative language!
The capital requirement would be based on a standardised risk assessment formula to be developed.
The formula would have variables which recognise risk mitigation. It would be a complex enough formula so I am not going to go into too much detail here. Safe to say that it would differ from the current lazy approach in that, for a start the following would result in a lower capital reserve/solvency buffer:
Good ALM practices
Capital security of assets i.e. investments
Loan book diversification
Attached savings
Provisioning levels
General Delinquency experience

Other less tangible or measurable factors would also come into play as well as scores for qualifications and experience of management.

I am more concerned with the capital reserve requirements of fresh funds coming into the CU as this is a major factor on sustainability and a CU's ability to grow.
It is always prudent to grow capital reserves as resources allow but to require a blanket 10% in year 1 for fresh funds is not reasonable. It doesnt affect CU's right now as most are just maintaining their asset size - withdrawals are, by and large being matched by lodgements but this will not be the position forever and CU's will need to grow and attract new funds.
 
@CUManager: credit co-operatives elsewhere attract wholesale funding. A group of credit unions in Australia recently raised tens of millions in external capital of which attracted a AAA rating.
The current approach is not lazy rather it realistically uses a widely used leverage ratio mechanism. Your write of a complex formula - do you really believe that credit unions would have the competence to apply a Basle 11 or 111 approach? You are also writing of quite complex developed rating and supervision systems similar to those used in the U.S. which trigger mandatory, prompt corrective regulatory action to mitigate risks. Rather than argue for complexity it might be better to consider the 10% leverage ratio and how this might be flexed. Recall the extended loan limits regime (2007) introduced the notion of flexibility linked to prudential standards. You may have a strong case to make but it won't be helped by attacking the regulator for being lazy.
 
I have called the actions of the regulator lazy on an anonymous forum, it hardly lessens my case!
I dont see Irish CU's accessing wholesale funding markets even in a post consolidation environment. The Austalian movement is not comparable to the Irish situation
Going back to basic principles of community savings being lent out to borrowers in that community - I dont see the answer to capital reseves being asking outsiders to invest (at what coupon rate!) so that the risk is shared and bondholers can get burnt. The Irish government had to withdraw from the bond market so I dont see CU's realistically being able to raise funds this way! and even if they could, why would they want to pay yields of 8-14% when we cant lend the funds we have right now at lower rates!
 
I mentioned the Australian case as but one example of other ways to fund reserve requirements - of course cu's here are no where near being able to use alternatives which is why they are in such a pickle. (The 1997 CU act allows for alternatives)

You remain reluctant to indicate what level of reserves you would deem appropriate for the current and anticipated trading risk scenario.
 
Outside capital is years off if it ever becomes a feature and outside risk taker require reward. I'm not sure thats in keeping with the CU ethos as the payment of such risk premiums would be paid for by the borrowers in our community - it would in effect take money out of the community. Not exactly desirable outcome for a community based co-operative!

The issue of reserves at present is not that simple.
The bizarre provisioning requirements imposed by the regulator together with the 10% solvency buffer are overly onerous. Provisioning and reserving are two sides of the same coin.
Requiring provision for perfectly performing extended term loans in the middle of a severe recession is over regulation.
To then apply a 10% solvency buffer on top of that regardless of whether the funds are held in cash deposits or in loans covered by savings (partly or fully) is over regulation.
The art of regulation is to allow the industry to function without undue risk of failure. The easy way to ensure no risk of financial failure is to over provide on loans and over provide on solvency buffers - but ignore the effect hat this has on the industry to perform it function to serve the needs of its members.
 
Can we keep this thread (in so far as is possible) to discuss the CU cap on members shares and its implications for CU members and stakeholders?

If we cant achieve this then Im afraid that every CU thread in the forum will end up as a generalised discussion and some very interesting aspects will be lost.

Thanks
aj
 
Back to the thread - here's my tuppence worth:

The reason why credit unions are capping share balances is because they haven’t sufficient capital to fund balance sheet growth.

Deposit (liability) growth is translated into assets (loans or investments) on their balance sheet and these assets require a regulatory reserve (capital buffer) support of 10%. The implication for their customers is they will or in some cases have become zombie credit unions unable to accept deposits and unable to lend.

Irish credit unions only generate capital from operating profits. Because they are experiencing hefty loan and investment losses and providing for anticipated losses, profits have plummeted. This is seen in the numbers unable to pay any dividend (80+) and numbers paying less than 1% (200) last year. Three hundred have lending restrictions applied by the regulator to control for credit and liquidity risks.

They are two other fundamental problems that pre-date 2008. They are operating a high cost model having failed to deploy modern technologies and haven’t achieved the size needed to (a) realise economies of scale which would allow them drive down costs/increase profits and (b) realise economies of scope allowing them to widen and deepen their products and services –which would address their reliance on interest income by increasing fee income.

The underlying issue is there are too many non-viable operations that should either consolidate into bigger credit unions or be closed down. Consolidation is needed to bolster balance sheets and ensure capital adequacy. Post-merger stabilisation (capital) funding will be needed to plug holes in the balance sheet i.e. impaired loan and investment assets.

But even when bolted together, consolidated credit unions may need more fresh capital which may have to come from the Government. This would kick start lending and allow them to expand their balance sheets. Consolidation would also allow them to realise both scale and scope economies, increase profits and begin to retire government support over time.

The implication for stakeholders is: will consolidation be merely a crisis management tool or will it be used to get credit unions operating as modern efficient and sustainable credit co-operative savings and loans institutions.
 
From today's news it seems there is a black hole in the credit unions of 1 billion.
 
You must log in or register to reply here.
Back
Top