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Restructuring credit unions

The final report of the Commission on Credit Unions, which was published yesterday, is likely to usher in major changes to the credit union movement. The future is likely to be one of fewer, larger credit unions offering a wider range of services to their members.

In common with other financial institutions, the economic downturn and the resulting bad debts has hit the credit union movement hard. With 51 of the country's 403 credit unions failing to meet the requirement that their reserves exceed 10pc of their assets, of which 25 are seriously under-capitalised, the need for reform is clear.

The report of the commission provides the credit union movement with a way forward after the difficulties it has experienced over the past few years.

It is to be commended for the speed -- it was first established at the end of May 2011 -- with which it produced its interim report, which was published last September, and now its final report.

The good news is that despite enduring the most severe economic and financial crisis for more than 80 years, over 300 credit unions, three-quarters of the total, remain in rude health. The bad news is that, in addition to the 51 credit unions which fail to meet the minimum reserve requirements, a further 50 are reckoned not to be strong enough to survive on their own.

What this means is that over the next few years these weak and undercapitalised credit unions are going to have to be merged with other credit unions to form larger, healthier organisations. While the commission report expresses the hope that such mergers can be "voluntary" there is no disguising the steel within the velvet glove.

With all credit unions now having to produce business plans that must be approved by the Financial Regulator -- while at the same time meeting tough new reserve requirements -- the reality is that those credit unions which are obliged to merge and those which retain their independence will be largely determined by the Financial Regulator.

Which, with the taxpayer having to underwrite the restructuring of the credit unions -- and any recapitalisation this will entail -- is only as it should be.

However, the commission report does take on board the views of the credit union movement when it opts for "tiered" rather than "one-size-fits-all" regulation. Basically this means that credit unions offering basic savings-and-loans services to their members will be subject to a simpler regulatory system than credit unions offering more sophisticated products and services.

In the past elements of the credit union movement have chafed at tighter regulation. After the events of the past few years such opposition is no longer an option. With hundreds of thousands of people dependent on the credit unions for access to cheap credit the sooner the report's recommendations are implemented the better.

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