Re: Just how safe are Credit Unions ?
Joe O Toole announced this week that he is to re-introduce his Bill for a statutory savings protection scheme (deposit insurance). He sparked an angry reaction from the ILCU who accused him of scaremongering. Seems a case of protesting too much. The fact is not one Euro of credit unions savings is guaranteed depite bank savings being guaranted since 1995. The law requires a credit union to participate in an approved regulated deposit insurance scheme since 1997 and yet nothing has been done by Government to set up a scheme.
Funny thing is I recall that the April 2006 run on Monaghan Credit Union started following media stories that the ILCU savings protection scheme support failed “to do what it said on the tin”.
It took the public assurances of the Financial Regulator before the run abated. This mini-Northern Rock it seems had come close to a contagious run from all accounts.
It’s quite a strange thing to consider but it would appear that the ILCU acts as a quasi lender of last resort which is quite unusual it seems in a modern system of financial regulation, supervision and deposit insurance.
No where else will you find a trade body being permitted to provide deposit insurance. This lies at the heart of the debate on what is called the credit union financial safety net which in Ireland is wholly inadequate.
Niall Brady writes of credit union savings protection in today’s Sunday Times and highlights the discretionary nature of assistance to a credit union and the possibility of compensation of only €12,700. He also highlights that some of the largest credit unions are not members of the ILCU. There are about 435 credit unions of which the top 50 control c54% of total assets with the top 20 c30%. The ILCU fund would be exhausted within days of a run on any one or more of the larger credit unions. That's if it's board decided to provide assistance. Serious concerns have arisen around the operations of this scheme where millions were "borrowed" to finance a failed IT project, The ILCU headquarters building and credit union buildinng programmes.
He quotes Liam O’Dywer, CEO ILCU as saying that stabilisation (what credit union call assistance) is a “health service” whereas deposit insurance is a “death service”. This is an interesting use of words as it seems to indicate the overriding concern of the ILCU is to bail out a credit union no matter how much trouble it's in. This body is a trade association for credit unions. It seems to me that his words reflect an inherent conflict of interest. If you look at the ILCU operations you'll see a number of business operations that propose a unhealthy degree of systemic risk. For example the ILCU underwrites billions in life coverage for its members, co-manages €3bn+ of their excess funds, and generates the vast bulk of its funding from commercial business operations.
As far as its supervision of its members compliance with safety and soundness standards is concerned: the Financial Regulator in its recent annual report which says:“During 2006 considerable progress was made in developing the system for the regulation of credit unions with a view to building compliance.”. The implication is that self-regulation and supervision did not build compliance and state supervision has still some way to go. This is testament to the current state of effective supervision and it’s not good.
O’Dwyer conveniently ignores the point that, internationally, deposit insurance schemes also include assistance to troubled but viable credit unions along with deposit guarantees. Of course they are established as government agencies and work closely with the regulatory and supervisory agencies. Stabilisation schemes, such as the ILCU provides, disappeared elsewhere years ago. They were seen to be too risky by credit unions and their trade bodies who lobbied for state deposit insurance.
The bottom line is this: if a credit union failed which would you prefer (a) a wooly promise from a trade body that they just might pay you back your savings or (b) a statutory guarantee that you will be paid. But right now all you get is a promise depending on which credit union you save with.
' from the ILCU. are they still credit unions? what kind of security is in place for depositors of these institutions and who governs them. Who regulates them? I am a member of Dundalk credit union and I read in the Sunday Times that they one of 15 who have withdrawn from the league. Should I not have been informed of this at the time?