How safe are the Credit Unions?

Re: Just how safe are Credit Unions ?

Ontour
The ILCU SPS is a stabilisation fund that may be used to provide either solvency or liquidity supports to credit unions. In the Monaghan CU case this appears to have been by way of guarantee rather than direct cash supports. (as reflected in SPS note in ILCU financial statements 2006 page 116 Note 15 [broken link removed] )

This is analagous to a lender of last resort function with its emergency liquidity support. I agree though it is not quite the same thing.

There is no notion of an insurance type payout within the ILCU SPS for savers. It is merely a text that appears to say that in certain circumstances and at the discretion of the board a payment may be made to savers.

Deposit Insurance (insurance is a bit of a misnomer) is quite different as it guarantees compensation to savers in the event of a failure. If you like consumer protection. Modern DI schemes also provide assistance to troubled but viable credit unions where a workout is possible called risk minimisation : here the focus is still on the consumer (saver) where sometimes it is better to provide assistance to a troubled credit union rather than compensate savers if it were to fail.

At a macro level it entirely correct to generalise as the financial safety net is designed to ensure the financial stability and safety of savings for the sector.

One of its underlying assumptions is the ordinary saver cannot judge safety and soundness and relies on the safety net to provide assurances that all is well.

Of course at credit union level, people should not only read the annual reports but also attend the agm and question the board. But on average c5% actually attend CU agm's and fewer still read the report. Even then they have no benchmark to judge their CU performance against. This is one of the reasons why the credit union financial safety net has to be designed carefully and more importantly all its agencies (regulator, superviser and deposit insurer) must be statutory government agencies.

The quote below highlights quality and the usability of accounts:
“This research, while recognised as being exploratory, suggests that the financial statements of many credit unions in both parts of Ireland contain incomplete and inadequate information. Such a situation may undermine the ability of users, and in particular members, to make appropriate judgements and decisions.” THE FINANCIAL ACCOUNTABILITY OF IRISH CREDIT UNIONS: AN INITIAL EMPIRICAL STUDY NOEL HYNDMAN, DONAL MCKILLOP, CHARLES FERGUSON AND TONY WALL* Financial Accountability &Management, 20(3), August 2004, 0267-4424
 
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Re: Just how safe are Credit Unions ?

Stand corrected on use of SPS. In Monaghan's cased it may be liquidity support however I thought that in the cases where credit unions had been defrauded, as in the case in Cork, SPS had stepped in to ensure that the members did not incurr that loss. I may be mistaken but I took these to be payments from SPS rather than loans.

The financial stability of the sector is not covered by SPS as it is based on membership of the ILCU rather than a regulatory requirement. I believe that this safety net for the sector is something that the regulator has/is/ will address.
 
How safe is your credit union ? How safe are credit unions ?
Well we don't know cos' some are safer then others and we can't tell one from another. We do know that savings are not guaranteed....yet government has a blindspot !

Very interesting blog here [broken link removed]
 
Kaplan,

You appear to have extensive knowledge of Credit Unions. Your comments are of the 'how safe are the Credit Unions' theme. Are you, or have you been, involved with the Credit Union organisation?
 
oldtimer said:
Kaplan,

You appear to have extensive knowledge of Credit Unions. Your comments are of the 'how safe are the Credit Unions' theme. Are you, or have you been, involved with the Credit Union organisation?
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Oldtimer,

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Credit Union financial stability exposed by the Northern Rock crisis.

News today that credit unions had over €100m on deposit with Northern Rock throws into stark reality the total absence of any statutory supports for credit unions in times of crisis. http://www.sbpost.ie/post/pages/p/story.aspx-qqqt=MARKETS-qqqm=nav-qqqid=27170-qqqx=1.asp

Firstly the conservative estimate is quite low. Tralee Credit Union’s exposure indicates, if other credit unions had similar exposures, the total is somewhere between €100m and €700m. It is fair to say the figure is well in excess of €100m. Just how much remains on deposit is unknown.

The ILCU points to €100m being a small amount when compared to total invested assets of €7bn but this is a deflection that all too conveniently misses the point. It is the exposure to credit union reserves which is the issue and the impact NR could have had on people who save with credit unions.

There is of course nothing improper with these credit union deposits as NR qualified under the Financial Regulator’s “Investment Guidelines” at the time. This isn’t the issue although questions do arise as the level of overall counterparty risk and limits.

The real issue is what could have happened. Once again the serious fault lines in the safety net provisions underpinning the financial stability of the credit union sector were highlighted. Consider these two risk scenarios:

(1) Contamination: Risk of a parallel run on credit unions
What would have been credit union savers’ reaction if they had found out that credit unions had over €100m on deposit with Northern Rock during the crisis days ? It is reasonable to presume that they may have started to withdraw money from their credit unions. If this had happened there was nothing in place to deal with it. No lines of liquidity, no state supports just the ILCU SPS which is a private controversial under-funded scheme of only €100m. It has no mechanisms in place to deal with a run on credit unions.

(2) Impaired liquidity and solvency
What would have been the situation had the UK authorities allowed NR to close. Credit union liquidity would have been immediately tied up and reserves exposed to loss. Again this is a high risk scenario which could have triggered a credit union run.

Of course none of these scenarios happened. However when considering financial stability and its supporting financial safety net such risks are provided for. But they are not under the current financial safety net provisions the government has in place for the credit union sector. Just how concerned and worried were government and regulatory officials during the NR crisis ? If they had been aware of the scale of credit union exposure perhaps they didn’t sleep too well.

The fact is there are no state provisions or mechanisms in place to deal with a credit union run….This state and its credit union savers are unduly exposed to risks as government has failed to act since 1997.

The irony is that the UK government provided a guarantee to Irish credit unions for their retail deposits of upwards of e€700m whereas the Irish government has no guarantee in place for the millions of people who save with credit unions.

Following Northern Rock, it is downright imprudent and dangerous for government to delay any longer in providing for a statutory deposit/savings guarantee scheme for credit unions.

Kaplan
informative blog here [broken link removed]
 
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