Friday 26 May 2017

Analysis: Rules mean little option other than a savings cap

Credit unions are capping savings because a savings surge is distorting their accounts and making it hard to meet regulatory rules (Stock photo)
Credit unions are capping savings because a savings surge is distorting their accounts and making it hard to meet regulatory rules (Stock photo)
Charlie Weston

Charlie Weston

If anyone needs any convincing that we have a long way to go before we recover from the convulsions of the 2008 financial crash, then the fact that credit unions are having to turn away money should clinch the argument.

Credit unions are capping savings because a savings surge is distorting their accounts and making it hard to meet regulatory rules.

Every €100 in savings has to be matched by €10 put into their reserves. This is to ensure they could meet demand from savers for their money back if a credit union hits a financial bump.

But there are two problems with this. One is that the money that needs to be provisioned for the savings has to come from the profits made from loans. Demand for loans is low at the moment.

So more savings means a lower surplus. Instead of giving the surplus or profits back to members, credit unions with high savings are forced to dip into the surplus to boost reserves.

In essence, more savings means a lower surplus, if loan demand is not there.

And credit unions are restricted by regulations in where they can put any excess funds if there is not sufficient demand from members for loans.

The list of investment classes where they can invest surplus funds is limited to low-yielding bonds and bank accounts. In today's low-interest rate environment, some banks are actually charging credit unions and corporates for large deposits.

The Central Bank has promised to review the rules. Allowing more mortgage lending by credit unions is one obvious solution.

Irish Independent

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