Irish Times: Credit Unions Face Serious Solvency Issues
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george.shaw
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Providing the state is solvent. Respected Dan O'Brien of the Economist Intelligence Unit estimates that there is a 25% chance that Ireland could become insolvent. I sure as hell hope not but believe important that this possible outcome is acknowledged.
Should keep some of savings in Irish credit unions, post offices, banks but would be imprudent not to have some of your eggs in other baskets.
Don't worry about your savings in credit unions. If 20 were insolvent, remember there is a scheme specially set up to help credit unions trade their way out of difficulty called SPS - Savings Protection Scheme, with over €100 million on hand to bail them out. Credit Unions are coming under pressure as many members are defaulting on loans and their investments are not giving them great returns. To be honest dividends will be low this year but in reality credit unions are far more in touch with the current economic climate than the banks are. In the current climate low dividends are what the banks should be giving depositors and not 3 + %. Also the movement is very strong and credit unions will rally around one another if they need to. Most Credit Unions also have very high reserves - typically 10% to help them out.
Regards
Mike
Regards
Mike
Brendan Burgess
Founder
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Hi cornmike
€100m would be fine if there was just one credit union. But if a large CU goes or a few small ones, there just won't be enough to go around.
The Savings Protection Scheme used to be at the discretion of the Scheme's trustees. In other words the trustees are under no obligation to bail out a failed credit union. Is that still the case?
I agree with you about the crazy rates paid by the banks.
€100m would be fine if there was just one credit union. But if a large CU goes or a few small ones, there just won't be enough to go around.
The Savings Protection Scheme used to be at the discretion of the Scheme's trustees. In other words the trustees are under no obligation to bail out a failed credit union. Is that still the case?
I agree with you about the crazy rates paid by the banks.
SlugBreath
Registered User
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- 435
We have a couple of Credit Union accounts where we keep about €10k. It is a very handy source to get cash over and above what an ATM might give you. Last year they paid a dividend equal to about 1%. Not great.
Having closed my Irish Nationwide and Anglo accounts because I have had enough of these chancers and turning my back on the higher interest they were offering I am now left with fewer places to leave my cash and faced with lower interest.
Yesterday we saw that the great mutual, the EBS is now effectively in state ownership. So much for them bleating on about staying as a mutual because of "outside" threats such as UK building societies when all along their biggest threat was within the society itself. They were responsible for the demise of their own mutual status.
At this stage I am considering opening an account abroad but the devil you know is better than the devil you don't know and that is why I am reluctant to do it. But I don't want to be a fool either.
My understanding is that a lot of Credit Unions are in fact Limited Companies?
Having closed my Irish Nationwide and Anglo accounts because I have had enough of these chancers and turning my back on the higher interest they were offering I am now left with fewer places to leave my cash and faced with lower interest.
Yesterday we saw that the great mutual, the EBS is now effectively in state ownership. So much for them bleating on about staying as a mutual because of "outside" threats such as UK building societies when all along their biggest threat was within the society itself. They were responsible for the demise of their own mutual status.
At this stage I am considering opening an account abroad but the devil you know is better than the devil you don't know and that is why I am reluctant to do it. But I don't want to be a fool either.
My understanding is that a lot of Credit Unions are in fact Limited Companies?
An Post paying 3pct for 30 day notice doesn't help Banks to reduce rates, when you can get such a high rate from your post office.....
Yes - that is still the case despite protracted negotiations between the ILCU, Dept. of Finance and the Registrar about the structure of SPS. The Minister described the SPS as a "backstop" to the Deposit Guarantee Scheme.
Credit Unions typically do not report annually what their actual defaulters situation is versus the provision for bad debts. Recent changes in the calculation method, called Resolution 49, have meant CUs must set aside even more from surpluses, putting pressure on dividend. THe proposals put forward in the new section 35 will give the Registrar very strong powers to regulate CU lending and liquidity.
Slim
Hi Brendan,
The SPS will be used to help credit unions trade their way out of their position i.e. if a credit union of say 150M in assets were insolvent it would put in 5M to help it trade its way out. Therefore the SPS will be able to cope with 20 credit unions becoming insolvent - not all large of course. There is no denying that if the SPS had to bail out credit unions then they would be in trouble. This is unlikely to happen as most credit unions over the last 3 years have written off most of their poor performing loans / investments. Where the problem will arise is if credit unions were masking bad debt arrears over a prolonged period and all their bad arrears are shown up now due to closer scrutiny and the new calculation of res 49. Most credit unions will be able to trade their way out of their current position - it will take just 2-3 years plus no or very small dividends. Also it is optional for SPS to pay out but their hands are tied. You might remember back a year or two ago Mitchelstown Credit Union had some problems and it caused uncertainty in the Credit Union movement and a run on money. This will not be allowed to happen again so SPS will step in if needs be.
Regards
Mike
The risk of a systemic credit union crisis is growing and is predominantly located within the top 100 who control close onto 80% of assets (loans & investments) and savings. Many will not be able to generate the surpluses required to fund loan losses, maintain regulatory capital and pay a dividend to savers. International experience indicates loan loss experience of between 50-70% on unsecured consumer loan arrears during bank credit crisis. Credit union arrears over ten weeks, a key risk threshold for short term consumer loans is escalating and heading towards 15% on average. Independent entities collective statistics hide individual experience significantly higher then the sectoral arrears of 13.5% reported by the regulator last week.
Investment losses have not yet been worked fully through accounts and some will continue to write down values this year. In 100 loan reviews carried out on the larger operators in the last year for the regulator over 85% were found to have underprovided for bad loans.
Credit union arrears over 10 weeks have jumped by over 100% from 6% to 13.5% (FR) before the new provisioning rules are applied this year which will cause over 300 to increase provisions by between 20-40% (ILCU). 20 are in serious financial trouble (FR)- this group probably includes some of the larger credit unions (€50-400m). One of the top five credit unions with assets >€200m was forced to provide for 10% of its loan book following regulatory intervention last year. Its entire net worth was represented by the value of its building which was conveniently valued at book value in its accounts. It experienced a small run as its agm was delayed.
New loan issues have shrunk on average 27% last year but total loans only declined by 4% which is evidence of the scale of rescheduling non-performing loans. Loan loss experience in crisis elsewhere on consumer unsecured loans is close to 10% - some higher depending on the pathology – credit union lending is undiversified and concentrated within geographic common bonds and employee sectors (public service).
Not all hit the 10% regulatory reserve ratio for last year and some didn’t make the 7.75% interim ratio. Upwards of ten have yet to hold their AGM’s for last year- this group contains some of the top 100. The regulator is concerned the ILCU SPS fund which it says is €120m would not be capable of supporting a solvency crisis. This scheme is legally unreliable, unapproved and unregulated by the FR and FSA and is only available on a discretionary basis to members of the ILCU both North and South (over 500 credit unions). There are a number of large credit unions who are not members of ILCU (North and South). As a backstop to a deposit guarantee scheme, in other words a stabilisation component of a credit union deposit insurance system, it is woefully inadequate and not fit for purpose which is why the FR is issuing a consultation document on credit union stabilisation. Questions have been raised over the liquidity of the fund and its ability to provide the emergency support required to stave off a systemic crisis in savers confidence.
Any analysis of typical credit union operations throws up a host of challenges related not only to rising loan losses but shrinking loan issues, higher liquidity, solvency and provisioning requirements, escalating operating costs and savings migration.
An unknown number of credit unions will not be able to trade their way out of trouble as the business model is bust. Regulatory rules containing risks – the regulatory reserve ratio and rules on rescheduling loans shows a backbone and willingness to grasp the nettle lacking until now. Hence the collective lobbying by credit unionists against amendments to legislation granting the regulator powers to issue binding rules on credit unions. They want light touch regulation to continue. The game is up for credit unions as this state is on the hook for implicitly guaranteeing over €11bn in savers deposits.
Kaplan
Investment losses have not yet been worked fully through accounts and some will continue to write down values this year. In 100 loan reviews carried out on the larger operators in the last year for the regulator over 85% were found to have underprovided for bad loans.
Credit union arrears over 10 weeks have jumped by over 100% from 6% to 13.5% (FR) before the new provisioning rules are applied this year which will cause over 300 to increase provisions by between 20-40% (ILCU). 20 are in serious financial trouble (FR)- this group probably includes some of the larger credit unions (€50-400m). One of the top five credit unions with assets >€200m was forced to provide for 10% of its loan book following regulatory intervention last year. Its entire net worth was represented by the value of its building which was conveniently valued at book value in its accounts. It experienced a small run as its agm was delayed.
New loan issues have shrunk on average 27% last year but total loans only declined by 4% which is evidence of the scale of rescheduling non-performing loans. Loan loss experience in crisis elsewhere on consumer unsecured loans is close to 10% - some higher depending on the pathology – credit union lending is undiversified and concentrated within geographic common bonds and employee sectors (public service).
Not all hit the 10% regulatory reserve ratio for last year and some didn’t make the 7.75% interim ratio. Upwards of ten have yet to hold their AGM’s for last year- this group contains some of the top 100. The regulator is concerned the ILCU SPS fund which it says is €120m would not be capable of supporting a solvency crisis. This scheme is legally unreliable, unapproved and unregulated by the FR and FSA and is only available on a discretionary basis to members of the ILCU both North and South (over 500 credit unions). There are a number of large credit unions who are not members of ILCU (North and South). As a backstop to a deposit guarantee scheme, in other words a stabilisation component of a credit union deposit insurance system, it is woefully inadequate and not fit for purpose which is why the FR is issuing a consultation document on credit union stabilisation. Questions have been raised over the liquidity of the fund and its ability to provide the emergency support required to stave off a systemic crisis in savers confidence.
Any analysis of typical credit union operations throws up a host of challenges related not only to rising loan losses but shrinking loan issues, higher liquidity, solvency and provisioning requirements, escalating operating costs and savings migration.
An unknown number of credit unions will not be able to trade their way out of trouble as the business model is bust. Regulatory rules containing risks – the regulatory reserve ratio and rules on rescheduling loans shows a backbone and willingness to grasp the nettle lacking until now. Hence the collective lobbying by credit unionists against amendments to legislation granting the regulator powers to issue binding rules on credit unions. They want light touch regulation to continue. The game is up for credit unions as this state is on the hook for implicitly guaranteeing over €11bn in savers deposits.
Kaplan
Moral Ethos
Registered User
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- 307
In theory yes, if the books are straight.
Credit Unions hold a board meeting each month. At this meeting an up to date account of the finances is presented to the Board showing income and expenses for the month. Not sure if these monthly statements of accounts are available for members' viewing or examination. It gives the Board a clear view of how the individual Credit Union is performing and if there was any downward slide it should be noticed very quickly. So to answer the question, if asked, a Credit Union should, at any time, be able to answer how it is performing.
Credit Unions review management accounts on a monthly basis and would not give them to members as they are not audited accounts. If you ask you will be wheeled into the managers office and she / he will just show you last years annual report containing the audited accounts and it will be waffled around them. Also many credit unions have covered up bad debts and all the birds are coming home to roost at the one time and also there are new regulations around the calculation of loans in arrears i.e. res. 49 which means more money will have to be put aside for for these provisions and less for dividends.
Regards
Mike
Regards
Mike
It is almost impossible to know how your credit union is doing until well after it has gotten into trouble. Even then its accounts are so opaque as to be almost useless to its members who are in the main financially unsophisticated and fobbed off with free draws and booze at annual general meetings. Less than 2% on average bother attending.
There is no way of comparing how your credit union is doing against others within its peer group. Although the data to publish comparison tables showing key financial safety ratios is held by both the Regulator and ILCU, neither have any notion of publishing even aggregate data. You are left wondering if your credit union is one of the few of the many or the some of the many that is in serious financial trouble. Thing is the ones that are in trouble are probably medium to large size ones.
Credit unions practice the mushroom approach - keep their members in the dark and feed them a diet of rhetoric. They remain the only credit co-operatives around that cannot tell you how much you will earn on your savings until after they have figured out if they have made enough money to pay you. And its said that ten haven't even gotten around to telling their savers yet since last year. Which means their savers are now without a dividend for over 18 months. They probably won't be paid anything for last year and this year.
Have a look [broken link removed] at St Anatomy Credit Union and here for recent [broken link removed]
Kaplan
There is no way of comparing how your credit union is doing against others within its peer group. Although the data to publish comparison tables showing key financial safety ratios is held by both the Regulator and ILCU, neither have any notion of publishing even aggregate data. You are left wondering if your credit union is one of the few of the many or the some of the many that is in serious financial trouble. Thing is the ones that are in trouble are probably medium to large size ones.
Credit unions practice the mushroom approach - keep their members in the dark and feed them a diet of rhetoric. They remain the only credit co-operatives around that cannot tell you how much you will earn on your savings until after they have figured out if they have made enough money to pay you. And its said that ten haven't even gotten around to telling their savers yet since last year. Which means their savers are now without a dividend for over 18 months. They probably won't be paid anything for last year and this year.
Have a look [broken link removed] at St Anatomy Credit Union and here for recent [broken link removed]
Kaplan
Kaplan,
The issues you raise are problems that will only be addressed by fundamental restructuring.
From the basic credit union accounts you can compare the reserves, bad debts, loans to savings ratios etc. As there are so many credit unions there is a large pool of information to compare against. 99.9% of people do not care about monitoring the financial performance of the credit union. Most of the people at the AGM are there to get out of the house or to enter a draw. There is very little difference between the ability to review the financial performance of a credit union and that of any listed company.
The league of credit unions signed a software deal with an Irish company a few months ago to provide software that gives them much better systems to evaluate the financial performance and controls of member credit unions. Probably a long way to go but there are signs of actions.
The fact that credit union dividends are determined at the end of the year is not a bad thing, it may not suit you but there are plenty of financial institutions that you can choose if this is an issue. When a financial institution quotes you a fixed rate at the start of the year, there is a risk factor that they have to include. Over the long term the institution that does not make the commitment upfront should deliver you a better return.
The success of credit unions is heavily influenced by the voluntary efforts of directors, unfortunately there are not 5000 people with financial/ marketing / management/ social care skills who want to get involved. Maybe it was a function of the Celtic Tiger that people did not volunteer and we will all flood back to giving freely of our time.
The issues you raise are problems that will only be addressed by fundamental restructuring.
From the basic credit union accounts you can compare the reserves, bad debts, loans to savings ratios etc. As there are so many credit unions there is a large pool of information to compare against. 99.9% of people do not care about monitoring the financial performance of the credit union. Most of the people at the AGM are there to get out of the house or to enter a draw. There is very little difference between the ability to review the financial performance of a credit union and that of any listed company.
The league of credit unions signed a software deal with an Irish company a few months ago to provide software that gives them much better systems to evaluate the financial performance and controls of member credit unions. Probably a long way to go but there are signs of actions.
The fact that credit union dividends are determined at the end of the year is not a bad thing, it may not suit you but there are plenty of financial institutions that you can choose if this is an issue. When a financial institution quotes you a fixed rate at the start of the year, there is a risk factor that they have to include. Over the long term the institution that does not make the commitment upfront should deliver you a better return.
The success of credit unions is heavily influenced by the voluntary efforts of directors, unfortunately there are not 5000 people with financial/ marketing / management/ social care skills who want to get involved. Maybe it was a function of the Celtic Tiger that people did not volunteer and we will all flood back to giving freely of our time.
The crisis will spark consolidation which is not a bad thing- fewer in number having the resources to build sustainable business has been the way others have matured and prospered. The problem here is time has run out and it is highly likely state intervention will be needed. This intervention will either look to preserve and enhance or crisis manage a work out to limit tax payer exposure. Credit unionists better wise up or they will get the latter.
RAINDODGER
Registered User
- Messages
- 16
just got the credit union accounts (delayed)
it needs to increase its bad debts provision by 6.5mill it was 2.7mill in 2008 this is on assets 62.5 mill.says it generated a surplus of 830 thou .lot of talk about market conditions also states its guaranteed by the iclu for 4.3mill.
is this c.u. going bust and is it time to shift my deposits?
also are the deposits covered by the state?
it needs to increase its bad debts provision by 6.5mill it was 2.7mill in 2008 this is on assets 62.5 mill.says it generated a surplus of 830 thou .lot of talk about market conditions also states its guaranteed by the iclu for 4.3mill.
is this c.u. going bust and is it time to shift my deposits?
also are the deposits covered by the state?