David McWilliams: We just can't afford to lose the vital services of credit unions
Published 13/11/2013 | 02:00
'Teenage Kicks' wouldn't have been recorded without the Credit Union. It's hard to imagine Derry without the Undertones. Today Derry is a very different place to the Derry of the mid-1970s when the band formed but, for this visitor, Derry and The Undertones still go together. And it wouldn't have happened without a £400 loan from the very credit union that John Hume set up in 1960 – the first ever in Ireland.
Looking out from the city walls over the Peace Bridge towards the Waterside, the Foyle flat and translucent in the crisp morning sun, the city looks photoshop pretty. This is a 21st Century Facebook Derry, basking in the final moments of the Year of Culture – miles away from the black-and-white, rented television Derry of my childhood.
Back then, Derry was a failed place where unfortunate "keyholders" were advised by UTV newsflashes to return to their premises; but it also had the unambiguous success of a few young lads from the Bogside on 'Top of the Pops', singing about teenage promise, some bloke called 'Jimmy Jimmy', the excitement of the summer and know-all cousins who "flicked the kick" at Subutteo.
Today the place is rebuilt. The glass and chrome of the property boom and massive investment have replaced the steel bars of the Troubles. Sandinos bar and cafe beside the bus station serves Latin American coffee underneath a large print of Che Guevara, wedged between the clenched fists of the Black Panthers' flags on either side of printed messages from Nicaragua's Sandinista movement. Derry is still different – half student revolutionary, half property developer.
But one constant has been the Derry Credit Union, founded by John Hume who saw that the rationing of credit was like the rationing of public housing. Those who owned credit determined who got credit and thus ruled the country. The local bank managers were Protestant, lending to Protestants and excluding the Catholic majority of the city. Hume understood that credit was a civil rights issue and the Derry Credit Union was much more than a proxy bank; it was a fundamental part of the civil rights movement.
In a recent interview in the 'Derry Journal', Billy Doherty, the drummer from The Undertones, explained how the Credit Union was instrumental in supporting them.
"With all up-and-coming bands, one of the most challenging things is how they can afford to buy musical equipment. This was certainly the case for The Undertones. We all came from modest backgrounds, with no easy money about to buy band equipment.
"Thankfully, we had arguably one of the best financial institutions on the planet to depend on, and for us that was Derry Credit Union.
"In 1978, Michael Bradley, our bass player, secured a loan from the credit union to buy me my first brand new professional drum kit.
"We got a loan of £400, and with the money that we earned from our weekly shows in the Casbah, a local venue in Derry, we managed to pay back the loan.
"Like thousands of people from the town we had the help of a local, dependable financial co-operative that supported the community and I'm so grateful for the wonderful service that Derry Credit Union provided."
This is why the crisis in Irish credit unions is so distressing. Credit unions provided money for people who the banks wouldn't touch. The credit unions provided small loans to small people, not big loans to big borrowers. This is an essential service – half financial, half social.
Credit, in the right amounts and spent on the right stuff, is crucial. For example, if a family has no access to credit they can't plan for the future. Take a family that wants their children to go to university but can't afford the immediate outlay.
Traditionally, without a loan to cover essential costs, this family would have to forego college and their kids would have had to go out and get a job. Then came the credit boom and we now know that the credit unions lent out against property and made the same mistakes as many of the banks. Why did the credit unions follow the banks into excessive lending?
Arguably, the banks were driven by the tyranny of that shallow ideology – shareholder value.
They had share prices, which were linked to short-term profits, determined by bank lending much, much more than what it was taking in on deposits. Remember deposits are liabilities to the banks (things they have to pay out on), while loans are assets (things they get paid for). So the logic of high share prices generated an equivalent high risk because the banks confused high prices for low risk when in fact high prices create high risk. But the credit unions – with no share prices to terrorise them – didn't have to chase the market. Understanding risk is so crucial to operating any financial operation. The thing about risk is that it is almost always a function of price. When prices are high and everyone wants a piece of the action, the prices tend to go up and up. This means they are driven far above fair value by the effervescence of the herd. Each month's figures evidencing yet more price rises, attract yet more new money. Over time people confuse higher prices for lower risk when in fact the opposite is the case. The credit unions that are now in trouble didn't appear to have this risk process inbuilt and they simply mimicked the banks.
More egregiously, it can be contended that they had less reason to do so because due to their co-operative and mutual characteristics, they didn't have shareholders to worry about.
Now the credit unions will have to rebuild themselves. This will probably involve lots of mergers. It would be a disaster if the regular banks made a move on the weakened credit unions.
The leadership of the credit unions must stand up now, explain their loses and promise their members that credit unions will get back to basics.
Lending and credit are the beginning of a process that can unleash creativity as we saw with The Undertones. We can't afford to lose the essential lubricant that is the credit unions.
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