The emergency fund used to help out credit unions in trouble is at risk because of its heavy exposure to bank bonds that have slumped in value.

The controversial Savings Protection Scheme (SPS) run by the Irish League of Credit Unions (ILCU) has about 10 per cent of its €100 million fund invested in open-ended perpetual bonds, according to ILCU chief executive Liam O'Dwyer.

The bonds, which have no fixed redemption date, have dropped in value because of interest rate movements. Although some of the bonds have yielded a profit, many others are showing unrealised losses.

It is estimated that credit unions have lost more than €25 million by ploughing surplus funds into the bonds, prompting the registrar of credit unions, Brendan Logue, to order an audit of the way credit unions value their investments.

Mr Logue has been critical of ILCU's discretionary bail-out scheme in the past and wants it reformed so it offers more protection to credit union members and becomes independent of ILCU.

The credit union body, which represents all but 16 credit unions in Ireland, will bring its proposals on a revised SPS to member unions later this year.

Meanwhile, ILCU is to change the way it calculates loan arrears, following pressure applied by the financial regulator, which was concerned that the current method was not giving an accurate view of credit unions' problems with bad debts. The change may result in an increase in the volume of provisions for bad debts by individual credit unions.