CREDIT unions are set to lose at least €58m from the impact of new banking rules that will make their deposits unattractive to banks, it has emerged.
The country's 400 credit unions have around €7bn on deposit, mainly in domestic banks.
But new global banking rules, known as Basel III and due to be implemented in 2015, are already impacting on credit unions.
This has led banks to slash the interest rates paid on the credit union deposits – cutting off a vital source of income for the community lenders, a report prepared by Davy Stockbrokers, and seen by the Irish Independent, reveals.
Under the new rules, credit unions are set to be classified as non-bank financial institutions. This means it is assumed credit union deposits are likely to be withdrawn from banks in a period of market stress.
"As a result, deposits from credit unions may no longer be as attractive to banks, especially those deposits with maturities of less than one year," the Davy report, written by Caroline Fox, states.
The Basel III rules are an attempt to ensure banks hold sufficient liquidity in crisis situations, according to the Davy report.
Deposit rates being paid to credit unions have already been cut to reflect the impact of the new Basel III rules, Ms Fox wrote.
The report suggests credit unions collectively lobby at national and European level to have their funds in banks reclassified to a more stable category.
A spokeswoman for the Irish League of Credit Unions (ILCU) said it was studying the proposals to examine the impact on credit unions. "The ILCU will attend a meeting in Brussels on Wednesday with the European Commission to start discussions on the proposals.
"We will also be meeting with the Department of Finance and the Central Bank on this issue and a further meeting has been sought with the European Banking Authority in London."
Credit unions have come to depend on interest earned from depositing surplus cash in banks as demand for loans has slowed during the downturn.
Traditionally, spare funds were invested in bonds, but large numbers of credit unions made heavy losses from bank bonds when the financial system started to implode from 2008.
And 16 credit unions suffered losses of €15m following the Government's decision to liquidate the Irish Bank Resolution Corporation (IBRC), the former Anglo Irish Bank.
Credit unions are also expected to be big losers when the new Insolvency Service of Ireland begins next month.
The Government has put aside €250m this year to capitalise credit unions as mass mergers are due to take place, as each credit union tends to be an individually owned and operated entity.