The anatomy of a Credit Union

[Brendan Burgess]

Hi Wizard

You are listing out a lot of unrelated issues.

The fact is that Anglo and Irish Nationwide would definitely have gone bust if the government had not stepped in and guaranteed their deposits. I don't know of analysis which contradicts that. If that had happened, the Credit Unions would have lost their deposits or a substantial part of them.

It could be argued that the other banks were solvent, but they too would have run out of cash, so they had to be rescued. It's likely that the depositors would have lost, although not as much they would have lost in their deposits in Anglo and Irish Nationwide.

So the fact is that the Credit Unions were bailed out by the tax payer although they and other beneficiaries don't like to say so.

Brendan

 

[NoRegretsCoyote]

Do you understand how the DGS works? Genuinely?

Yes.

A small share of the deposit base is paid into a fund which accumulates over time.

This fund is dipped into when an institution is resolved and if there is not enough funds available to make good all deposits under €100k.

My point is that the DGS contribution is microscopic compared to a credit union's deposit base and does not really constitute an incentive to behave well. A credit union in resolution will use up multiples of its contributions over the years. Likewise other credit unions could go for a century without ever needing access to it. This is why I think it is not exactly fair insurance.

Most importantly, the taxpayer is always and everywhere the residual guarantor of a DGS when there aren't enough accumulated funds. There is also the financial stability argument. If people start to think that credit union deposits won't be honoured then there could be a destabilising run on the sector.

So yes, as a taxpayer I do think that credit unions should be regulated.

 

[WizardDr]

Hi Brendan

You fail to answer or acknowledge ANY issues.

1. Did credit losses sink the Banks? Yes
2. Did credit losses sink the credit unions? No
3. Where did €500m of a rescue fund get conjured up from (hint based on analytics and then forward projections - They were doomed we were told)
4. Did Credit Unions have their lending restricted on bases of 3 above?
5. The conjured up 10% Reserve.
6. The protection of savings was a strategic issue and applied to ALL including the Banks. That is entirely a different matter as well you know.
7. Reduced Credit Union lending because of 3 resulted in temporary surplus of funds.
8. Answer why DoF will not let CU place funds with NTMA
9. Are all these relevant enough?
10. Your understanding of CUs is otherwise excellent.

 

[RedOnion]

6. The protection of savings was a strategic issue and applied to ALL including the Banks. That is entirely a different matter as well you know.

It's not entirely a separate issue. You seem to only look at DGS from the perspective of the deposits placed with credit unions. Brendan is talking about the benefits the CUs received from the banks being guaranteed.

The credit unions had credit risk exposure to 2 main fronts:
1. The lending to their borrowers, and
2. The credit risk of the banks they placed funds with.

If the DGS hadn't existed, and banks had been allowed to fail, credit unions would have been decimated overnight.

There was approx 17m of Credit Union funds still invested in an IBRC product at the date of liquidation, which at the time looked unlikely they would ever get anything back. This was a drop in the ocean compared to the deposits they had, which were covered by DFS / ELG when the guarantee came in.

So, in my opinion

2. Did credit losses sink the credit unions?

They would have, without the guarantee.

7. Reduced Credit Union lending because of 3 resulted in temporary surplus of funds.

Ah now, you know the CU sector better than anyone here. Several credit unions had massive surplus funds long before the financial crisis. There's nothing temporary about it.

I don't agree with Brendan's overall analysis, but it's difficult to have a worthwhile debate about the CU sector if you fail to acknowledge that there are any issues.

 

[WizardDr]

Sorry we are at cross purposes here.

Let us be clear. It was the possible losses on the loan book that allowed the Central Bank to drive the mother and father of the greatest excessive and regulation designed to put them out of business one by one. This had nothing to do with Deposits actually. It was the loan book. So the raft of 'regulation' that placed a risk officer; a compliance officer; an internal auditor all in the equivalent of a branch of a bank was fair and equitable? And you don't think there is a case to answer by Central Bank and their defective analysis? And then CU lending was restricted?

Let me call this out. It was defective analysis. It heralded a crucifying level of regulation that had a sole purpose of forcing amalgamations when in fact it was not justified. My issue with Brendan is that he wont address those issues whilst effectively saying they are irrelevant.

The harping back to the Deposits was not of CU making (their alleged poor lending was) and the fact that all Deposits were so guaranteed was a different matter and the Government did not guarantee the deposits to simply rescue the Credit Unions. In fact I do not believe that entered the thought process. So every entity that had deposits with Banks including MNEs, firms, partnerships - by Brendan's logic they too were all bailed out and they too should have been allowed to fail and on it goes.

So then having your reputations slated, having voluntary directors restricted to only one one board (you can be on 50 SPV vehicles in IFSC), you have your lending curtailed and that all based on defective predicted analysis that was totally wrong.

So if you were jailed and it turns out you were innocent how would you feel?

Brendan has a responsibility to understand more. Dublin 4 was not exactly where the Credit Unions flourished and the Sandymount Credit Union in a shoe box would not be representative say of likes of Health Services CU. Have a look at that for Fintech and where they have gone.

Ask yourself why do the plain people place their savings with Credit Unions. None of this is forced.