Seamus Coffey: More credit union failures are inevitable – and we'll pay price
Newbridge Credit Union is insolvent. On its balance sheet the liabilities it owes exceed the assets it owns by €8m. Under credit union regulations the value of a credit union's assets must be at least 10pc greater than the value of its liabilities. For Newbridge Credit Union the current figure is minus 10pc.
One asset that Newbridge Credit Union has is its office premises. This premises was completely rebuilt in 2006 and was the largest item on the fixed-asset register. However, boom-time values for land and commercial property are no longer applicable today and the current value of the premises needs to be recorded in the financial accounts.
In 2012, another credit union investigated the possibility of a merger with Newbridge Credit Union and estimated that a premises writedown of approximately €15m would have to be allowed for before the merger could proceed.
The largest assets of any credit union are the loans to customers it has issued. The last published figures for Newbridge Credit Union show that it had €140m of outstanding customer loans in 2010. It is now known that there has been serious regulatory breaches in relation to the lending practices of Newbridge Credit Union.
Credit unions are restricted to making loans that are not greater than 1.5pc of their total assets. For Newbridge this would have meant that no individual loan could exceed €2m. The largest loan approved was for €3.2m. Newbridge Credit Union had €40m of "special exemption loans" many of which were provided for property development. This is not the lending practices typically associated with a credit union.
It really should be no surprise that huge amounts of these loans are now in default and a large proportion will never be repaid. The credit union itself had set aside a loss provision of around 30pc of its total loans. The special manager who has been in place since January 2012 has estimated that the required loss provision needs to be around 45pc of total loans, requiring that €56m be set aside for bad debts.
The party interested in 2012 indicated that their estimate of the required loss provision necessary before a merger could take place to be €91m. These are incredible losses on a loan book of €140m.
Somewhat surprisingly, given these known problems on the asset side, it was difficulties on the liability side that brought the issue to a head in the past few days. In the past four months, the credit union has seen a net reduction of €11m in deposits and member shares.
As a result of the recent withdrawals, the credit union was close to reaching a liquidation trigger point – running out of cash. Once that point is reached the credit union would have to shut its doors and enter resolution.
A question automatically arises as to why this failed institution is being saved. An alternative to the rescue through PTSB is to place the credit union into liquidation, realise the value of the assets through a sale, and divide the resulting proceeds among members and depositors.
With a statutory guarantee of deposits up to €100,000 in place, the State would have to make up any shortfall for the vast majority of members. Details released yesterday indicate that just 15 individuals had more than €100,000 in the credit union and the total amount in excess of the guarantee threshold they had was €1.1m.
There are also a small number of accounts not covered by the guarantee. In the main these are from charities, schools and community organisations who were likely using a credit union account to avail of reduced charges. In total, these accounts had less than €1m in them. If the credit union was put into resolution there would be around €2m of creditors at risk, all the remaining depositors would still have to be made good.
Although we need to get to a situation where non-systematic financial institutions which have failed are allowed into resolution, in the case of Newbridge Credit Union there are few benefits from doing so as most of the money has left. The public cost of saving the credit union is similar to the amount it would cost if it was liquidated.
Allowing the credit union to fail would likely increase the final cost as borrowers would be less likely to repay their loans and the receipts from an immediate sale of the assets may be lower than what could be realised with a gradual wind-down of the loan book. There may also have been knock-on consequences for other credit unions.
The 400 credit unions in the country have total loans of around €7bn and total deposits of about twice that amount. The credit union sector is not going to run out of money – and while there are unlikely to be many that have been as profligate as Newbridge Credit Union there are going to be more credit unions found to be in unsustainable positions.
Precise figures are not available but loan losses of around €1bn can be expected across the sector as a whole and that figure is probably at the lower end of the range. Credit unions have set aside some provisions to cover the losses but they simply cannot absorb the scale of losses that are likely. Further failed credit unions are inevitable.
Newbridge Credit Union has been shown to be a failed entity. It is on a much smaller scale to our delinquent banks but the reason for its demise is the same – profligate lending. The €100,000 deposit guarantee means it will be bailed out with public money and, once again, the losers will be the broader population rather than the specific people who instigated the lending or those who provided the money for the lending.
Seamus Coffey is a lecturer at UCC