All credit unions will have to pay levy for new rescue fund
Objections offset by need to save 80 lenders at risk over arrears
Published 11/10/2011 | 05:00
THE Republic's 407 credit unions will be forced to pay a levy into a new state bailout fund, it has emerged.
To be operated by the Central Bank, the fund is expected to come up with some of the finance needed to prop up around 80 credit unions that are at risk of failing.
The setting up of a statutory protection fund is one of the key recommendations of a commission on the sector which is due to be discussed by the coalition cabinet today.
As part of the setting up of the new Central Bank fund, the Savings Protection Scheme (SPS), which is owned and operated by Irish League of Credit Unions, will come under the control of Dame Street regulators.
The SPS was set up by the league to provide emergency funding to ailing member unions.
Up until recently there was €120m in the fund, but it is understood that there is less than €70m left in it after 20 credit unions sought support.
Some of the SPS fund will have to be handed over to Northern Ireland league members.
Finance Minister Michael Noonan revealed last week that the Government was preparing to pump in between €500m and €1bn to support the merging of collapsing credit unions with stronger ones.
Arguments against credit unions contributing to the new fund, and objections by the league to losing control of its SPS fund, will be countered by the fact that credit unions do not contribute to the cost of the State's €100,000 deposit guarantee.
This has saved the sector around €25m. There is some €12.6bn on deposit in the Republic's 407 credit unions.
The cost of the deposit guarantee scheme for the banks is based on a premium of 0.2pc of eligible deposits.
Beefing up the bailout fund is necessary to counter rising member loan arrears.
Almost €1bn worth of loans at credit unions have not been paid for 10 weeks or more.
This represents gross arrears of around 18pc of the €5.2bn loan book.
Rising arrears have put the future of around 80 credit unions at risk as they are unable to put aside sufficient reserves to withstand losses due to the recession.
Regulators in the Central Bank are demanding that every credit union puts aside 10pc of the value of its loan book into reserves this year.
The commission's initial report also recommends that new rules on the fitness of credit union directors be drawn up by the Central Bank, sources have indicated.
Chaired by Queen's University academic Prof Donal McKillop, the commission is set to produce a full report by next March when it will define what it means by a viable credit union.
This will probably prompt a wave of mergers across the sector. Legislation currently going through the Oireachtas will give the Central Bank powers to force consolidation of credit unions.