Credit unions urged to pay into 'stabilisation fund'

CREDIT UNIONS should pay into a new fund to help “stabilise” the sector, in which 27 institutions are in serious need of capital, a Government-appointed group has advised.

The Commission on Credit Unions, in its interim report, has also called for enhanced regulation of the movement, as well as a greater emphasis on internal audit and risk management.

“The regulatory framework is not as well developed as in most mature credit union movements,” said commission chairman Prof Donal McKillop yesterday. Prof McKillop, of Queen’s University in Belfast, also said consolidation in the sector would allow for “a more sophisticated approach” in general.

The commission found that 56 of the Republic’s 408 credit unions were in breach of a requirement to keep 10 per cent of their asset base in reserve, as of the end of June this year. Within this group, 27 credit unions had reserves of less than 7.5 per cent.

Reserves are designed to allow credit unions to deal with unexpected events, such as an excess of liabilities over assets.

Prof McKillop said it was “a very good news story” that most credit unions had met the reserve requirements. He highlighted strong levels of liquidity within the sector as another positive.

The commission’s report also shows that credit unions had €1 billion in loans that were more than nine weeks in arrears at the end of June, almost triple the level recorded in 2006.

Loans written off almost tripled over the same period, climbing to €107 million, with almost 100 credit unions having arrears in more than a quarter of their gross loan books at the moment.

Prof McKillop pointed out that provisions had climbed from €204 million to €738 million over the same five years, which is “what you would expect”. He added that it was “not for certain” that arrears would continue to grow.

Minister for Finance Michael Noonan said earlier this month that credit unions may need to be recapitalised by up to €1 billion, reflecting the precarious position of some. Yesterday, he said he hoped to publish legislation on regulation “at an early date”.

Under the commission’s proposals, a stabilisation fund would be financed by the credit unions but governed by the Central Bank. It would be used to assist credit unions that are “viable” but are in difficulty, with stabilisation to include the provision of financial and technical advice as well as recapitalisation. In some cases, credit unions would be “resolved”, or brought to the end of their life.

“The expectation is that the Government will make money available with regard to resolution,” said Prof McKillop.

The commission did not consider the level of stabilisation that might be required but Prof McKillop said the experience of credit union movements in other countries suggested either 1 per cent of the deposit or asset base might be appropriate.

“Our recommendation is that the stabilisation fund should be funded by member contributions,” said Prof McKillop.

He said credit unions had not been involved in the same excesses as the banks during the economic boom. He pointed to investment losses at credit unions, which peaked at €73 million in 2008 but had dropped to €8.4 million by last year.

The commission’s interim report was warmly received by bodies representing the credit union movement. The largest such group, the Irish League of Credit Unions, said the movement “must now address the shortcomings which are highlighted in this report”, while the smaller Credit Union Development Association said it supported recommendations on governance matters.

The Credit Union Managers Association said the proposed changes would ultimately strengthen the sector.

The commission is due to deliver its full report to the Minister for Finance by March, 2012.

CREDIT UNIONS REPORT: THE HARD FACTS

Interim report – in numbers

* 408 – number of credit unions in the Republic.

* 56 – number of credit unions failing to meet minimum reserve requirements.

* 27 – number of “seriously undercapitalised” credit unions.

* €1 billion – total arrears as of June 2011.

* €738 million – total provisions as of June 2011.

* €215 million – total bad debt provision as of September 2010.

Interim report – main recommendations

* Establish a “stabilisation fund” which would be financed by credit unions to help secure viable institutions.

* The Central Bank should have “resolution” powers to bring a credit union’s existence to an end.

* Each credit union must appoint a risk management and compliance officer and develop an internal audit function.

* A prudential “rule book” should be introduced. Such an initiative would help to set out what is required of credit unions.