How Safe Are Credit Union Deposits?

Slim said:
Rossie - that is NOT how credit unions calculate their dividend. They take surplus of income overexpenditure, less contribution to Statutory and other reserves, including bad debts, and then decide how much of what's left may be distributed to members as dividend. It is not set at year start to attract funds. Slim
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Yes, its not how they calculate their dividend/interest rebate, however, it is good to compare to a KNOWN benchmark.
 
Isn't that just the problem Slim. Irish credit unions are the only ones of modern credit unions that still insist on declaring dividends from profits. Which means that savings are still regarded as a form of capital. This thinking and behaviour went out with the wireless and black and white TV in other countries where credit unions no longer rely on the share account.

Instead almost all of their funds are retail deposits paying interest rates. In the US credit unions treat dividends as a form of interest payment paying it many times a year.

Think of the nonsense of saying to someone, I want you to lend me your money and depending on how well I use it and whether or not I make a profit on it, I might pay you something at the end of the year. Better still consider interest rebates - I will charge you more than I should on your loan and if I make a profit I might give you some interest back.

@rossie2010 your point is well made. Share accounts are similar to 60 day notice accounts and depoist accounts with credit unions (which amount to less than 10% of total savings) are 21 day notice accounts under law. Where attached to loan withdrawals under certain limits tied to the loan cannot legally be allowed. Some credit unions have argued their dividend is a good as if not better than bank demand deposit rates and some have even said that they at least pay a dividend on shares unlike the banks! On a risk adjusted basis and product features credit union rates should be at least 3.5% if not higher to compensate for undivsersified and sectoral risks. Thing is if credit unions paid interest they would quickly become insolvent - hence the silver lining in the dividend which allows zero rates to be paid when no profits are made.

On a genaral note the law is by not means clear as to how shares should be dealt with under liquidation - they would appear to rank after deposits even if covered under the DGS. It's a grey area and one that has not been tested in court yet.
 
kaplan said:
Irish credit unions are the only ones of modern credit unions that still insist on declaring dividends from profits.
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Not true, there are credit unions in the US and other parts of the world that pay dividends. Many don't but Ireland is not alone.

kaplan said:
Better still consider interest rebates - I will charge you more than I should on your loan and if I make a profit I might give you some interest back.
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You prefer the bank that makes the profit and doesn't give it back to the customer but instead spends it on management bonus', golf balls and other luxuries. I do not understand you contention that they are charging more interest than they 'should'. How are you determining the interest they should charge?

Dividends and rebates are a part of collective financial experience that is usually community based. Choice is important, the ethos and operation of credit unions will appeal to some while online interest maximising deposit accounts will appeal to others. Diversity is good.
 
kaplan said:
... Thing is if credit unions paid interest they would quickly become insolvent - hence the silver lining in the dividend which allows zero rates to be paid when no profits are made....
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You say that as if it were a bad thing. It's a very good thing. I would rather receive a low or zero return on my savings than have my CU driven into insolvency. And I don't want my CU put under pressure to make risky loans in an effort to fund a rate of interest that it is obliged to pay.
 
credit union dividends slide to zero

@ontour : suggest you check up on the US basis for dividend payments which are treated like interest payments. Other countries you allude to are largely developing nations with less sophisticated credit union models and financial service sectors. But you may have a good correlate with the Irish system in mind. Have a look at one of the Candadian provincial credit union laws for the treatment of share accounts. You'll also note the sophistication in regulation.

WOCCU's [broken link removed]is for 70-80% interest bearing deposits and 20% share capital - which are share accounts in the legal sense here in Ireland

@padraigB ; the problem is there isn't enough fuel in the tank to pay a decent rate of return to savers and cover losses, fund operating costs and regulatory reserves required at current post-boom business volumes and costs. Even before the bust most credit unions were running at far too low reserves, preferring to compete with each other to generate the highest dividends - perversely maximising short term shareholder value, while ignoring the dire need to address costs through investing in modern processes and technologies while clinging to a redundant business model. Bad debts were seriously underprovided for - 70% were over the outer delinquency levels in 2005 with neglible write offs - many manipulating provisions to maintain dividends. Many breached legal lending and savings limits and invested in products they did not understand such as perpetual bonds, equities and subordinated loan stock.

Something had to give - first the dividend rate, then what's now happening is a shrinkage in balance sheets as both savings and loans decline. Result is losses that can only be financed from reserves = long term solvency problems. Cutting costs is a zero sum game unless large scale rationalisation occurs to achieve credit union scale and scope - which is what the central bank has in mind. At the same time new safe loans have to pick up along with other sources of income. Another real problem is the bail out distortion in the savings market means credit unions cannot compete on rate which is seeing a lot of attrition as people shift savings to banks. Funny thing is banks once complained to the EU about credit unions distorting the market with their non-dirt ordinary share status - these accounts still make up 70% of total savings balances. Still they shouldn't complain as they are the net beneficiaries of collection cost free billions in credit union savers funds placed on deposit with them by credit unions at retail not wholesale rates. Imagine you are paid a zero dividend rate and the bank down the street gets the use of your money paying your credit union top rates - but you don't get the rate? What sense is there in that model? Credit unions are acting as a cheap source of retail funding for Irish banks and paying their savers near zero or zero dividend rates while banks use the money to shore up their loans to deposit ratios. So much of the mobilsation of household savings. €7bn of savings tied up in Irish banks compliments of credit unions of which €3.5bn should be made available as affordable loans.

Even funnier credit unions are only supposed to place money on deposit with Irish or EEA authorised banks having a long term rating of[broken link removed]What's Bank of Ireland, AIB, IPTSB, EBS, INBS & Anglo's rating today?

I note that you have conveniently skirted the elephant in the room - the legal definition of share accounts as form of member capital/equity implicit within the Irish credit union act. It's why some credit unions continue to show member shares under "members resources" on their balance sheets instead of liabilities. Anyone care to discuss the legal ranking of shares v deposits in a liquidation?
 
Kaplan,

You are taking a technical analysis of the back office operations of credit unions as the only basis for evaluating whether credit unions should exist or not. There is no argument that there are significant structural and regulatory problems with the credit union system in Ireland. Your questions about liquidations and the treatment of shares is a valid concern.

There are US credit unions that pay dividends on share accounts based on a retrospective view of performance. I am not sure what you meant by their 'treatment'.

Cutting costs is not a zero sum game. There are individual credit unions in Ireland with far more staff than the like of Nationwide UK have running their operations here. Credit Unions in Ireland became generous with their staffing levels and pay during the boom times. Mergers and rationalization is inevitable but very much like our political system it will be a pointless exercise without structural reform.

I still contend that credit unions play an important role in the Irish financial services system. They will be even more important as many banks wll become increasingly selective about focusing on high value customers.
 
@ontour
US credit unions pay dividends more than once a year - similar structure to interest scheuldes on deposit accounts.
I have never written than credit unions should exist or not. Rather the sector is important but preserving 410 individual credit unions, many of which are dysfunctional is not important. Profitablity and solvency will drive mergers part of which should be a shift to a lower cost operating model. The test of dysfunctionality is an inabilty to sustain dividends to savers. Even then some of those that are paying are doing so using some creative forebearance - putting rotten meat in the freezer in the hope it will magically thaw out as good meat.

Cost control within the existing business model and operating cost base supporting as it does high volume low ticket transactions is pretty hard - a zero sum game as costs cannot be reduced in line with declining business volumes. This is not a techical analysis of back office operations but a view on end to end businss process costs and credit co-operative financial performance indicators.
I too contend credit unions are an important and indeed are a systemic part of the overall financial services system, but only if they are restructured and reformed.
 
the main point Kaplan you are making is pointing out the difference between Credit Unions and banks.

The Credit Unions are still thriving because its based on people not "profit and more profit".

Economics works on the principle of carrot and stick approach, paying interest rebate at year end encourages people to keep their affairs up to date.

I know of 4,500 people that are very happy receiving an interest rebate two weeks before xmas each year and receiving a dividend too.

Its a matter of what suits each individual, many individuals like the security of have a few quid in the credit union, safe in the knowledge that they can borrow 4 times it.
 
Any big rate offered by the banks is accompanied by big conditions.

Getting 1% from your credit union is normally better than up to 3% from your bank.

ie you make one withdrawal in the Bank rate drops to 0.01%, where as in the credit union no such restrictions on ordinary share accounts.
 
rossie2010 said:
BOI is rated A1 with Moodys,

AIB is rated A1 with Moodys,

PTSB is rated a3 with moodys
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Fitch and S&P rate AIB & BOI as BBB.

rossie2010 said:
Any big rate offered by the banks is accompanied by big conditions.

Getting 1% from your credit union is normally better than up to 3% from your bank.

ie you make one withdrawal in the Bank rate drops to 0.01%, where as in the credit union no such restrictions on ordinary share accounts.
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That is a generalisation. It is true to say that many banks have hidden T&C's but not all accounts do.

Your money is not better off in the CU because of sneaky T&C's on a minority of bank products.

A credit union will pay you between 0% and 2.5% (in a rare case), you can earn up to 3.6% with a bank such as Investec. The difference in return is vast.
 
See some good data here on credit union dividends - posters should log their credit union rate.

Whatever about the "not for profit" business model which is common to all credit co-operatives including Dutch RaboBank, paying nothing or next to nothing to savers is wholly dysfunctional and defending it is a perversion of credit union values, principles, ethos and objects. [broken link removed] what an Irish credit union could and should look like

People are borrowing less not more from their credit unions and only 20% of shares are attached to loans - which means of the balance in savings of c€10.5bn, the vast majority of savers are paid a less than decent rate and 20% of them nothing at all.

The governments banking stabilisation bill will allow it to take over a credit union and direct the transfer of its business to other credit institutions including the conversion of share accounts to deposit accounts under the transfer. Why would you think this is being allowed for?

@ciaranT: add the fact that your local credit union may be the one paying a zero rate of return or close to zero. Choice of credit union to save with or borrow from is not an option, whereas choice in banking and building society products, rates and features are.

@rossie2010 Suggesting that paying elderly savers nothing because they might want access to a loan is rank nonsense.
 
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