Some Credit Unions Now Capping Balances at €15,000

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Some Credit Unions Now Capping Balances at €15,000.

Irish times article here.

This is obviously a direct consequence of negative interest rates.
 

Brendan Burgess

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And it's long overdue.

It was crazy for them to be taking deposits from members when they couldn't lend them on.

Brendan
 

noproblem

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Changed times, who would have thought that this could ever happen? Then again, with all this negative interest rate journey I have no doubt some very bright spark will come up with a business plan to suit the situation.
 

Slim

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Our credit union capped deposits and shares 15 years ago because of the inflow of savings versus the difficulty in competing with banks on lending.
 

Ciadan

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My 80 year old father got a letter yesterday telling him he has to withdraw his shares by 30th April to bring the balance down to €20k. His current balance is approx €33k.
 

24601

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My 80 year old father got a letter yesterday telling him he has to withdraw his shares by 30th April to bring the balance down to €20k. His current balance is approx €33k.
I would imagine the current crisis will result in much more of this happening. Saving rates will increase in the coming months at the same time as increases in arrears (and bad debt provisions) and falling loan demand. They have nowhere to put this money so they need to return it to members.
 

Ciadan

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I would imagine the current crisis will result in much more of this happening. Saving rates will increase in the coming months at the same time as increases in arrears (and bad debt provisions) and falling loan demand. They have nowhere to put this money so they need to return it to members.
I've been trying to get through to the CU to see what will happen if he doesn't withdraw by 30th April. but the phone isn't being answered.

Considering he's 80 and "cocooning", I wonder how they expect him to get to the branch to withdraw this money.
 

NoRegretsCoyote

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I would imagine the current crisis will result in much more of this happening. Saving rates will increase in the coming months at the same time as increases in arrears (and bad debt provisions) and falling loan demand. They have nowhere to put this money so they need to return it to members.
How does this work in practice? Supposing you just refuse to withdraw or ignore the letter?

What if your only account is at the CU? Are you obliged to withdraw it in cash?
 

24601

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I've been trying to get through to the CU to see what will happen if he doesn't withdraw by 30th April. but the phone isn't being answered.

Considering he's 80 and "cocooning", I wonder how they expect him to get to the branch to withdraw this money.
How does this work in practice? Supposing you just refuse to withdraw or ignore the letter?

What if your only account is at the CU? Are you obliged to withdraw it in cash?
Nothing will happen. There's actually no mechanism for them to force withdrawal as far as I know. They might pester people but they are dependent on voluntary compliance. Most operate a bit of common sense and won't create hassle for older and/or vulnerable people but many are trying their level best to get the money off the balance sheet.
 

24601

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Can they start charging on large balances?
It's not clear. My own interpretation of the Credit Union Act is that they can but I have seen opinions to the contrary. I think they could impose a cap on share accounts (savings) and do the following:
  1. Request members to withdraw excess savings above €XX,000 by a certain date,
  2. Where the balance has not been reduced below the cap transfer the excess balance to a deposit account which will be subject to a negative interest rate.
Most credit unions introduced caps on savings but allowed members to keep their existing balances at the date it took effect - this had limited impact on slowing the growth as most growth was driven by an accumulation across lower balances. There appears to be very little appetite for a savings cap as low as would be required to minimise this sort of growth so many are now examining returning savings to members above their cap. This is complicated by the fact that they need co-operation to achieve this and they can't physically force someone to do an EFT, withdraw money or cash a cheque. They should probably impose low enough caps and hope for high levels of compliance.

I think it's probably unlikely that they will start applying negative interest rates because of the huge reputational risks, but at this stage, who knows? Some will probably have no choice.
 

WizardDr

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Let us be clear why CUs are seeking to cap Shares and Savings.

It is because of the lunacy of the conjured up Reserve Ratio of 10% against ALL Assets.

So when CU get €100k in Shares (liability) they have also an Asset (bank or even government bonds) and because of the increased asset - they must hold 10% reserve.

This reserve is only out of retained profits

The fact that they increasing or not increasing lending is irrelevant.

If the ratio was 4% -no bank would have needed rescue. There is a basis for that size of ratio. Not 2.5 times that again.

There is no academic research supporting a ratio of this level. It is an entire fiction but the hapless ILCU do not seem to know how to take on CBI on fictions.
 

EmmDee

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Let us be clear why CUs are seeking to cap Shares and Savings.

It is because of the lunacy of the conjured up Reserve Ratio of 10% against ALL Assets.

So when CU get €100k in Shares (liability) they have also an Asset (bank or even government bonds) and because of the increased asset - they must hold 10% reserve.

This reserve is only out of retained profits

The fact that they increasing or not increasing lending is irrelevant.

If the ratio was 4% -no bank would have needed rescue. There is a basis for that size of ratio. Not 2.5 times that again.

There is no academic research supporting a ratio of this level. It is an entire fiction but the hapless ILCU do not seem to know how to take on CBI on fictions.
Irish credit unions don't have a problem meeting reserve requirements - their problem is the opposite. They average over 16% reserve ratios with some over 30%. They can't utilise deposits.

You could make it 1% and they'd still be pushing deposits out the door
 

RedOnion

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Irish credit unions don't have a problem meeting reserve requirements - their problem is the opposite. They average over 16% reserve ratios with some over 30%.
Out of interest, did you take a look at the regulatory reserve ratios of the credit unions that have actually imposed savings caps?

It's very much a factor in putting savings caps in place.
 

WizardDr

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What I am saying is that people should be free to put savings (and there will be zillions as we hit recession) CUs should be able to grab the opportunity.

CBI brought in cap for delusional reasons that were touted (€500m in bailout) that turned out to be bogus.
 

24601

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Let us be clear why CUs are seeking to cap Shares and Savings.

It is because of the lunacy of the conjured up Reserve Ratio of 10% against ALL Assets.
That's not the full picture. As has been mentioned there is no problem maintaining capital adequacy in the near term, although it will become more challenging. The main problem is that they're only around 30% lent. With interest rates where they are they have no business taking €100 from Mary and going across the road to pay AIB to take it on deposit. They're destroying wealth doing this. There's also other residual insurance and operational costs associated with taking the money. They're not investment clubs so a savings cap is appropriate.

The peculiar thing is that contrary to your point, the high regulatory reserve requirement, and the general move by the sector to build up huge buffers on top of this, will likely see it weather the impact of COVID - so despite all the cribbing about the reserve requirement it is serving its purpose and judging from the average reserve ratio credit union boards are content with it.

There's plenty of credit unions with failing business models that can limp on for 3 or 4 years thanks to their robust capital base. Is that a good use of earnings built up over the last decade?
 

NoRegretsCoyote

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The problem is at least partially age-related. Credit unions have a lot of older members who save but don't borrow. Over-55s account for half of all savings but about a quarter of all loans.

The 30-54 age group borrows more than it saves (as you would expect) but the deposit base seems to have a very old skew.

See slide 15 here.
 

EmmDee

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What I am saying is that people should be free to put savings (and there will be zillions as we hit recession) CUs should be able to grab the opportunity.

CBI brought in cap for delusional reasons that were touted (€500m in bailout) that turned out to be bogus.
CU's could grow deposits. But what would you advise them to do with the increased balances. Regulatory ratios are an added complication but fundamentally not the core issue - start with the core question - if you're a CU with €100's of millions in balances, what do you do with it
 
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