Credit unions in mortgage market told they must weigh up risks

The Central Bank has said it supports a relaxation of its rules so that credit unions have more room to manoeuvre in the mortgage market, but warned that individual institutions must ensure they fully understand the risks involved in longer-term lending.

Credit unions in the mortgage market are currently bound by a general ban on having more than 15 per cent of their loans at more than 10 years to final payment.

Patrick Casey, the Central Bank's registrar of credit unions, speaking at the National Supervisors Forum's annual conference in Westport, Co Mayo, said the regulator was considering proposals for diversification in credit union loan portfolios.

“The proposals support diversification in credit union loan portfolios, while effectively managing duration and concentration risk,” he said.

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“Changes include a removal of maturity limits based on a percentage of outstanding loans, and the introduction of tiered concentration limits for both house and commercial loans based on a percentage of total assets.

“These proposed changes would provide increased flexibility for all credit unions to undertake additional personal lending – in particular between five and 10 years.

Resilience

“For larger credit unions, who can demonstrate that they have the required financial strength and resilience, expertise, capability and risk management mind-set, the proposals would provide significant additional capacity to undertake house and commercial lending, via a new application process.”

Mr Casey said the Central Bank was of the view that proposals to increase long-term lending “should be considered by credit union boards”.

“We emphasise the need for the boards of credit unions to ensure that they fully understand the risks involved in longer term lending, including financial, regulatory and consumer impacts,” he said.

“The Central Bank is supportive of credit unions prudently engaging in long-term lending as part of a balanced loan portfolio, and the new proposals facilitate this across a suite of loan categories to meet members’ needs.”

More generally, Mr Casey said credit unions were facing “significant financial and commercial challenges”, including a low loan to assets ratio, low investment yields and high-cost income metrics, translating into declining return on assets across the sector.

Governance remains one of the “key risk areas” for credit unions. Mr Casey said it was “concerning” that almost 60 per cent of individual risks identified during on-site engagements related to governance and operational risks.

Risk management

“We are still seeing high levels of weakness relating to risk management and compliance reporting,” he said. “In terms of operational risks, issues cover IT governance-related vulnerabilities, inadequate segregation of duties and deficiencies in terms of key reconciliations.”

He said higher-performing credit unions have typically moved beyond a mere “tick box compliance attitude” to exhibit a more rounded governance culture, with the board and management teams demonstrating “strong risk awareness and understanding”.

“While there has been some improvement in governance standards across the sector, the position is not uniform,” he said. “There is a need for continuous focus in this key area. The absence of a strong governance culture inhibits the credit union.

“This is the case not only in addressing regulatory requirements, but also inhibits the credit union from effectively responding to emerging business challenges, and by extension ultimately protecting members as consumers.”