It might sound strange but a surge in savings into the credit union sector is causing major problems, forcing many of the community lenders into imposing savings caps on their members as a way of reducing their savings levels.
Why is this happening and where does it leave their members?
Surge in savings
Savings have continued to rise across the credit union movement, as risk-averse members look to shore up their deposits.
According to the Irish League of Credit Unions (ILCU), savings in the sector increased by 5 per cent in the year to March 31st, which means that credit unions across the Republic now hold a record level of savings, at some €13.2 billion, up by 3 per cent on 2018, and by 20 per cent on 2008.
Thurles Credit Union said its savings rose by €7.46 million in 2018 alone, while Michael Connolly, chief executive of Palmerstown Credit Union in Dublin, said its level increased by 5 per cent in the past year and it now holds €36 million in savings.
A boost in savings would normally enable credit unions to boost their lending, and by extension their income but credit unions are operating in an environment where there is currently low demand for lending.
Figures from the ILCU show that lending by credit unions has slumped from €6.4 billion in 2008 to €4.25 billion as of March this year. This year’s figures are at least up on the nadir of €3.5 billion reached in 2015, and are up by 7 per cent on 2018.
“Ideally if we could lend out more that would be great,” noted one credit union manager of the current environment.
Falling interest rates
The issue is compounded by the fact that while deposit rates for retail savers have declined of late, so too have rates offered to institutional savers such as credit unions.
Typically, credit unions would have earned income on member’s savings that had not been loaned out to other members, often generating a substantial income.
However, with plummeting interest rates, some banks have started charging institutional customers such as credit unions to hold their money, while others are charged negative rates on their current accounts. This is an additional cost for credit unions.
AIB for example, is understood to be charging corporate customers as much as 65 basis points, or €6,500 on a €100,000 deposit, to hold their money.
Earlier this year, Paul Reddin, manager of Drumcondra Credit Union, wrote to members telling them that the board of directors of the credit union had voted to institute a limit of just €15,000 on member savings.
The reason? Low interest rates.
“The current rate of return offered to us from banks is still negative. This means every time we lodge money the bank charges us,” he wrote, adding “Our concern is, the larger the savings, the larger the charge.”
In 2016, the Central Bank of Ireland imposed an individual savings limit of €100,000 on a per member basis, but as our research shows, many credit unions now have much lower savings limits in place. Some larger credit unions, such as St Canice's in Kilkenny, Core in Dublin, and St Paul's Garda Credit Union, still have limits of €100,000, but many others have since slashed theirs.
Killarney Credit Union has imposed a limit of €30,000 for its members, as it found that it was having to put too much money in investments "which we are receiving a very low or zero interest rates", making it difficult for the credit union to generate a surplus.
As Link Credit Union told its members when implementing a €25,000 limit, "it is not feasible for us to continue to increase savings that are a cost to the credit union and to a level further beyond any likely demand for loans from members".
Credit Union Plus, based in Meath and Cavan, says that over the past five years investment returns on member's savings have dropped from an average of 5 per cent to just 0.5 per cent, which has made holding savings difficult.
Duleek Credit Union in Co Meath, has taken a slightly different approach, limiting monthly savings to €2,000, up to an overall limit of €30,000 per member.
Capital requirements
But it’s not just negative rates or low lending demand that are causing a problem. Other credit unions, such as Sligo, argue it’s a factor of the Central Bank’s approach to capital requirements.
“Due to the capital levels required by the Central Bank, we can no longer accept savings greater than €40,000,” it said.
Credit unions must keep 20 per cent of their funds liquid but argue that banks have reduced how much they will accept on a short-term basis, while others have imposed negative rates.
Connolly says that for every €1 million in savings taken in, credit unions have to reserve €100,000 (10 per cent).
“As such, Palmerstown Credit Union has taken the decision to limit savings to €50,000 in order to manage our balance sheet and member expectations,” he noted.
As the regulator for the sector, the Central Bank says it is “aware” of the savings caps, and realises how a surge in savings at a time of low interest rates “presents business challenges for the sector”.
However, it is holding firm to its reserve requirements, arguing that “adequate reserves support a credit union’s operations, provide a base for future growth and protect against the risk of unforeseen losses”.
Dividends
As noted by Killarney Credit Union, which has limited savings to €30,000, this capital requirement also depletes the amount available to pay a dividend at year end.
Dividends are how credit unions reward their members, and in line with general interest rates, have been falling in recent years.
Connemara paid a dividend of just 0.03 per cent last year, while Thurles paid 0.05 per cent.
And with less income being generated, and more of a pressure on their reserves, offering a decent dividend is proving difficult.
“The more savings you take in the more your demand is there on your reserves, and your reserves are your first call before a dividend,” says one manager.
But even here there is a catch-22, as one credit union manager noted. If credit unions were to offer a higher dividend, then they could attract more savings, which would then exacerbate their problems.
What’s a credit union member to do?
If members are being requested to curtail their savings, where can they go with the excess?
Not all members with savings in excess of the limit will be asked to move their savings. At Palmerstown for example, members with savings in excess of its new limit of €50,000 won’t be asked to withdraw funds.
However, they won’t be able to continue to save with the credit union. While the ILCU was unable to give a figure as to the exact number of credit unions who have imposed a savings cap, as our table shows, there are least 37 across the country with caps, and the number is growing.
At Killarney, for example, it’s estimated that just 2 per cent of its total membership will be affected by the €30,000 cap – but this is still about 600 members. And, given the number of credit unions with caps across the country, the total numbers affected must be in the thousands.
“The biggest headache for people is where to put it,” says one manager, adding that some customers have been annoyed that the credit union won’t recommend an alternative home for their savings.
Deposit rates are on the floor right across the banking sector, with most banks now offering a return of just 0.01 per cent on their instant access accounts. And, as banks pick up the flow of outgoing deposits from credit unions, it means that there is less of an incentive for them to offer customers a better deal in order to attract more business.
The new limits however, may only be temporary.
“Credit unions who are limiting savings will have taken this decision in the best interest of their members, and will be keeping the decision under constant review,” says a spokesman for the ILCU.
