Saturday 18 November 2017

Richard Curran: Will Central Bank clean-up spell end of credit unions?

central bank
central bank
Richard Curran

Richard Curran

The Central Bank has got a big challenge on its hands in dealing with the credit union sector. Like mini-versions of the banks themselves, some credit unions have become financially vulnerable after the crash.

It is estimated that around one in four of them are on a watch list with the Central Bank. Yet, the final cost to the taxpayer of facilitating new mergers or realising losses is expected to be in the region of €500m.

That is nothing compared to the €64bn cost of bailing out the banks. It is less than 10pc of the cost of Irish Nationwide Building Society alone.

The Central Bank appears to want to clean up the credit union situation by facilitating mergers and creating a stronger and more stable sector. The problem is, it may just be suiting itself. 

The bigger, stronger and more stable the credit unions are in the future, the easier it is for the Central Bank to watch them. But the bigger they become, the less like credit unions they become and the further they move away from their defining ethos.

Many credit unions have to up their game, in terms of training, corporate governance and internal financial systems. Some are already brilliant at it. But transforming them into mini-banks will serve the regulator , but perhaps not the customers or the people behind the movement who have built it up so successfully.

Canada is a good case in point. About 20 years ago, its credit unions got into trouble and many of them had to be bailed out or merged. The financial regulator used it as an opportunity to completely re-shape the sector. It pushed many of them together into mergers and the movement was transformed.

The regulator there watches credit unions so closely, that its staff have real time access to the IT systems within the credit unions. This is all good stuff on one level. Canada’s banking and credit union sectors avoided the last financial crash.

But are they still credit unions? In 1984 there were 1,547 credit unions in Canada. It has consistently fallen to the current 379. The largest five credit unions have 36pc of the assets, 1.5m members (31% of the total) and 304 branches. The top ten have Cn$60bn in assets or 47pc of the total. The top 100 have 91pc of the movement’s assets.

In a way, the big credit unions now inhabit the mid-size part of the banking sector. Is that what the Central Bank has in mind for Irish credit unions?

Perhaps merging lots of them would give them greater financial strength, and the ability to provide better training and more services to customers. This would enable credit unions to provide a sizeable competitive challenge to the big banks.

However, it would take them very far away from their founding ethos.  A middle ground has to be found here.

Newbridge Credit Union seems to have been a particularly difficult case, where far too much money was lent to developers. Something had to be done. Yet it was ironic to read how the Central Bank did not have the powers to pursue anyone at the credit union for alleged breaches of rules.

Even if it did, how could it seriously pursue individuals who made mistakes and did not personally enrich themselves in the process. It would be a joke to even consider going after anyone, when the Central Bank did nothing about the breaches of rules at Irish Nationwide Building Society, which it was fully aware of for years.

The sales prospectus for the society even included references to the fact that sectoral exposure rules and others had been consistently broken for a number of years. This was a society that cost the citizens €5.4bn . The Central Bank floundered and didn’t even exercise the powers it had.

There are real issues to be tackled in tidying up problems some credit unions have. Right now they appear to be getting disproportionate attention from the regulator which is leaving some of the healthier ones, hamstrung when it comes to serving customers.

The so-called pillar banks had to be saved because they were “pillars”. Unfortunately, no one credit union could be described as big enough to be a “pillar.”

However, the contribution the movement as a whole has made to the Irish economy up and down the country for decades, means collectively, credit unions can only be described as a “pillar” of this society.

Finding the right balance will not be easy. 

Richard Curran

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