Some Credit Unions Now Capping Balances at €15,000

[Gordon Gekko]

The problem is much simpler than people are making out. The credit unions earn negative returns on the deposits and then not enough customers borrow. They should pass those negative returns on to customers.

 

[24601]

The problem is much simpler than people are making out. The credit unions earn negative returns on the deposits and then not enough customers borrow. They should pass those negative returns on to customers.

I agree but the reputational risk is seen as too high, especially when no bank has passed on negative rates to Joe and Jane Bloggs (yet!). They should definitely explore some sort of happy medium. You could have savings up to some nominal amount earning nothing (e.g. €10k) with anything above this is put into a deposit account earning a rate linked to their average reinvestment rate.

Alas, some are still paying dividends on members' savings. A peculiarity of the legislation is that they have to pay a dividend on savings to be allowed to pay a rebate on loan interest which seems bonkers from a balance sheet risk management point of view.

Their representative body is lobbying hard at present to have the regulatory reserve ratio relaxed. This boggles the mind when you look at the average reserve ratio of ~16%.

 

[EmmDee]

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.

Just on this - I think there are two separate issues being confused / conflated.

Reserve requirement is the amount of customer deposits that a bank (am assuming CU) must hold aside as liquid assets. I think this is what you are referring to with the 10% ratio i.e. if a CU takes €100 in deposit, it must keep at least €10 in cash and can in theory lend out €90. This reserve is not out of "own funds" or retained profits. It is a reserve of customer deposits that must be kept as liquidity. 10% is not an unusual amount for banks - it is the level large US banks have to hold for example. It can be higher in some countries

The Capital Ratio (under Basel regulations) is the level of "equity" or reserves that a bank needs to have to support it's activity. It is based on the risk weighting of it's assets e.g. loans, investments etc. Minimum tier 1 capital ratio for banks under Basel is 8% but most large international banks are operating significantly above this. In the last crises, the banks which were operating at 8% or close to it required additional capital injections. 4% would be suicide in any period of volatility. For a CU, the risk assets would be loans. But if the loan book is shrinking, RWA and capital ratio would be shrinking. It is directly tied to assets (loans, investments) and not liabilities (deposits)

The difficulty is that both the reserve and capital are earning nothing at the moment (in fact - probably costing money). Added to that is a high reserve because they can't lend. If I keep 10% of deposits in cash but can lend out 90% at a reasonable rate, I cover the cost of the 10% plus a margin. But if I can only lend out 50% of deposits, the rate I need to earn on this 50% to (a) cover the negative rate on the reserve plus (b) the cost of the capital to cover the risk means I am losing money

There is a lot of academic research and investigation into capital requirements - these levels weren't made up over a pint

 

[NoRegretsCoyote]

I agree but the reputational risk is seen as too high, especially when no bank has passed on negative rates to Joe and Jane Bloggs (yet!). They should definitely explore some sort of happy medium. You could have savings up to some nominal amount earning nothing (e.g. €10k) with anything above this is put into a deposit account earning a rate linked to their average reinvestment rate.

I think their deposit base is so sticky they would lose little enough in the short run by imposing negative rates, especially on higher balances.

The legality of this is untested I think. This was raised earlier in the thread or on another.

 

[RedOnion]

Just on this - I think there are two separate issues being confused / conflated.

No, you're confusing banks and credit unions.

Credit unions, by law, must hold 10% regulatory reserves against their entire assets. It has nothing to do with Basel or liquidity. It's set out in the Credit Union Act, and the rate was set by the Central Bank. And it's not total reserves, but regulatory reserves.

Credit unions don't risk weight their assets. It's based on total assets.

 

[NoRegretsCoyote]

Credit unions don't risk weight their assets. It's based on total assets.

Yeah this part sounded strange. Most credit unions wouldn't have the capacity to apply an IRB approach.

Isn't this also why regulators have been wary of letting CUs get into the mortgage business?

 

[2bmortgagefree]

With the cash reserves that Credit Unions have, I think the Credit Unions should be allowed enter the mortgage market to compete for switcher mortgages with good loan to value. It would introduce competition to mortgage market and allow credit unions function.

 

[RedOnion]

Isn't this also why regulators have been wary of letting CUs get into the mortgage business?

Ah, there are many reasons the regulator stops credit unions doing certain things. In reality not all credit unions are the same, but they all get tarred with the same brush when it comes to decisions.

 

[Siobhánín]

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.

They can....they posted me a cheque during the week. Have opened a post office book account. Will be using the money soon for refurbishment but will there be consequences for lodging over 10k in a post office book account?

 

[Pinoy adventure]

They can....they posted me a cheque during the week. Have opened a post office book account. Will be using the money soon for refurbishment but will there be consequences for lodging over 10k in a post office book account?

No there shouldn’t be as long as you have proof of where the money came from too satisfy money laundering regulations

 

[deco87]

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

Irish times article here.

This is obviously a direct consequence of negative interest rates.

Where could you put money over balance being capped ? Safely , without losing value - uncle has 50 k over - balance capped - he is very worries this is his money for emergency- peace of mind

 

[ClubMan]

Where could you put money over balance being capped ? Safely , without losing value - uncle has 50 k over - balance capped - he is very worries this is his money for emergency- peace of mind

You'll have to read some of the other threads in the banking/deposit/investment forums as there's no easy answer.
Sticking it on deposit in a bank or the Post Office is one option.
But that will probably be at 0% or less interest and maybe with charges.
With inflation at 5% or more that means that the money is losing value.
But other options also have some risk/return profile.
What does he need the money for and when might be be likely to use it?
What's his age and general situation?