€100k limit on Credit Union deposits

Discussion in 'Credit Union issues' started by MrEarl, Dec 28, 2015.

  1. MrEarl

    MrEarl Frequent Poster

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    Hello,

    What are peoples views on this new rule that the Minister for Finance has introdued (background here ) ?

    Personally, I see the rule as anti competitive.

    Savers should have freedom of choice in terms of where they place their deposits.

    A person might have a preference for the credit union movement given it's mutual ethos for example.

    Obviously, competitive rates could be a nother factor, while ease of access to funds could be another example.

    What do other people think ?
     
  2. theresa1

    theresa1 Frequent Poster

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    Totally agree - too much interference and making things overly complicated. I'm not with any Credit Union but I can see why they are annoyed.
     
  3. CiaranT

    CiaranT .

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    No commercial bank nor credit union should have a small number of depositors that, if they pulled their deposits, would cause the bank / credit union to be in trouble.

    For example, Nationwide UK (Ireland) have a cap of 2 million EUR on deposits. Why? Nationwide UK (Ireland) want deposits spread over as many people as possible to prevent a few large depositors creating too much risk. Good risk management.

    A credit union is a small organisation. Say 5 people held 200k in their accounts, and the credit union had 3 million in deposits in total. If those 5 people pulled their deposits, the credit union would be in trouble as the credit union is overly dependent on those 5 people. Just 5 people have 33% of deposits held. A massive risk.

    Deposit risk weighting needs to be controlled, this is either done by the CU themselves or via regulation. I would not trust a lot of CU management to have the know-how to conduct deposit risk weighting themselves, as such I applaud Noonan's regulatory approach. That said, a more scientific approach could have been done. However, a more scientific approach could have caused much lower caps for some CU's. Therefore, on balance, Noonan has made the right move.
     
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  4. MrEarl

    MrEarl Frequent Poster

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    Hello CiaranT,

    Firstly, you make reference to the UK's Nationwide Building Society and while your point is obviously right, the key difference there is the limit is self imposed.

    Secondly, while the implication is that Mr. Noonan made this decision to help spread the risk of a CU relying on a few large depositors, I have not seen any evidence to proce that this was a significant or widespread concern within the CU movement. Have you seen anything to support the possible risk across the CU movement (and if so, could you please link to it) ?

    If Mr. Noonan was so concerned with spreading risks, then I would have expected that he would also impose limits on all of the Banks operating in Ireland and not just the CU's - whether the monetary amount was the same for all, or not.
     
  5. Jim2007

    Jim2007 Frequent Poster

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    Yes great idea! Let's just wait until it happens and blame the government et al for not doing something about it! CUs were never intended to act as an alternative to a bank for large deposit holders and are not subject to the same safeguards. The alternative would be to treat CUs as banks and apply Basel III to them - they'd all have to close. Would that be a better solution???
     
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  6. MrEarl

    MrEarl Frequent Poster

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    If you want to go that route, then they would have to licence them as Banks so as to put them on an equal basis with Banks, in terms of what services they offer, what they can invest in etc. It's either all or nothing, if you want to throw Basel III into the mix (and lets even make reference to CRDIV while we're at it ;))
     
  7. 24601

    24601 Registered User

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    Straight out of the horse's mouth; here's what the CU Registrar had to say to the Joint Committee on Finance, Public Expenditure & Reform: "[o]ne of the arguments put forward against the cap is that it will limit the ability of credit unions to develop their business models. This is hard to accept, given that the figures show, at this time, that savings of over €100,000 represent a very small proportion (1%) of total savings. We also note that, at the sector-wide level, credit unions are holding extensive deposits relative to their lending needs, and many have self-imposed deposit limits well below our proposed cap."

    So even the registrar is pointing out that only 1% of total savings are above €100,000 suggesting that this blunt approach is not "good risk management" - in fact it's indicative of a pretty lazy regulatory approach. I can see the argument for a capital-weighted concentration limit or even limits being imposed directly on CU's with high-risk exposure, but a 100K limit across the board is unfair. As she also pointed out many have limits below the cap, as is their prerogative. This is the least of CU's worries but, on balance, Noonan has made the wrong move. It will have nil effect in the near future but once the sector becomes further consolidated and matures it may cause funding issues and put them at an even further competitive disadvantage with the banks. I'd imagine for most CUs it's a matter of principle.
     
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  8. Black_Adder

    Black_Adder Frequent Poster

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    With the greatest respect to Jim2007 - and a simple summary of Basel III. In essence the total capital as a % of Total Assets is about 3%. That is three percent. The figure depends on the 'risk weighting of assets'.

    For Credit Unions the figure is 10%. TEN Per cent. Its against ALL assets. It is BOGUS,lazy, punitive and should have been challenged by now and will fall apart of challenged.

    That is THREE times the Banks.

    Question for readers:

    Name all the Banks that did not have to be bailed out?
    Name all of the Credit Unions that failed excepting Newbridge.
     
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  9. Black_Adder

    Black_Adder Frequent Poster

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    I note Marian Harkin MEP has raised the €100k limit with the European Commission.
    I think it is worth remembering that you never placed money with the Credit Union for a superior financial return.
    In fact those that were glad to have been able to use Credit Unions when they needed them often are happy to place
    funds with them to ultimately benefit others. And though there was imprudent lending by some, their core lending was not where the problems
    arose. I just wish the Central Bank had a few people who could articulate why they are worth preserving and also why their core 'viability' argument is bogus. (I posted where the APR of Ell is 1265% - one hundred times that of Credit unions.
     
  10. Black_Adder

    Black_Adder Frequent Poster

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    Last edited: Mar 14, 2016
    http://www.irishtimes.com/business/...ay-in-deposits-in-2015-central-bank-1.2572446

    The Irish Times has revealed that Irish Savers have salted away an extra €2.5bn in saving despite the close to zero rates offered by Banks.

    Why has the Central Bank brought in yet another pointless, baseless restriction on Credit Unions?

    There needs to be accountability by the Central Bank who fanned the flames of the imminent destruction of the movement prior to 2012. Will it take a judicial review on the Constitutional right to a livelihood as enunciated in the Paperlink case to bring this forward?

    [Have a look at Health Services CU / Dundalk CU / St Pauls CU as examples of strong CUs]

    [I wanted to repost this as a separate item because of the Report but the anti-credit union alliance objected and moved the post. So most wont see the new information which is a separate point]
     
    Last edited: Mar 14, 2016
  11. CiaranT

    CiaranT .

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    Interesting report on 2015 deposits. Whilst, deposits were up as a whole in 2015, deposits in deposit accounts are down but deposits in current accounts are up. AIB, Ulster Bank and PTSB had a net loss of deposits while BoI and KBC had a net gain including current accounts, whilst, State Savings investments (not classified as deposits) soared.

    Even taking that into account, not fully clear where the 2.5 BN increase fully came from, perhaps CU's and other players (Rabo, NUK etc) had net deposit gains.
     
  12. TheJackal

    TheJackal Frequent Poster

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    Got a letter off CANA CU saying their old limit of 70K max deposits is dropping to 50K from 1 July 2016.

    Seems mad that they don't want the deposits!
     
  13. Monbretia

    Monbretia Frequent Poster

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    They don't want them because if they have surplus to requirements and lending demand they can't even get a good rate anywhere for the excess funds.
     
  14. MrEarl

    MrEarl Frequent Poster

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    Correct. Due to current restrictions there are very few things that a Credit Union can do with it's members shares - essentially it can either lend the money out to other members, or place it on deposit with a Bank. Within certain limits, I think they can also invest in certain categories of State and Corporate Bonds but only extremely safe Bonds, which means once again almost no return.

    From what I hear, the majority of credit unions are in the same boat, all have too much money from members shares and are unable to lend it out. Crazy situation when you consider how the Banks are growing their loan books and there are still problems with loan sharks !
     
  15. CiaranT

    CiaranT .

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    Negative returns on surplus funds is probably one reason.

    Another reason is the fact that the CBI have put limits on how dependent a credit union can be on a small number of deposit holders.
     
  16. MrEarl

    MrEarl Frequent Poster

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    Good point CiaranT, although that also equates to restricting the Credit Unions ability to grow at any significant pace - unless it happens to have access to 500,000 members, who have savings of €45k pp.

    IMHO, the Central Bank has commenced the process of destroying the credit union movement. It is already undermining the foundations of what credit unions were set up for, by compelling the credit unions to lend based on certain criteria, place more and more funds into provisions (above compulsory requirements), "force" them to merge etc.

    Approx. 400 credit unions will become 10 within the next decade or therabouts and then those left standing will be permitted to offer a few more services, subject to then calling themselves Building Societies or something with similar meaning.
     
  17. willyfones

    willyfones Registered User

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    I would agree there seems to be an almost suspicious obsession by the Central Bank to force mergers of Credit Unions. I would have thought many CU's that may even be quite small work just fine.
    Growing deposits and not enough lending is a problem for all CUs, but if they could offer some mortgage products for example. Surely members money could be put to better use, for say for very low LTV. Or those just about to clear off their mortgage

    But I suspect the Credit Union lobby (if any) to be fairly weak in comparison with the banks. They should be out there kicking up a stink.. god knows the people would be on their sides vs the banks.
     
  18. Brendan Burgess

    Brendan Burgess Founder

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    The Central Bank imposes another bizarre rule on Credit Unions which I did not believe when I heard it first.

    The Credit Union must have reserves equal to 10% of their entire assets.

    So if they have €10m in loans to members and €10m in savings, they have total assets of €20m and so they need €2m of reserves.

    If they get a lot of deposits which they can't lend out, their reserve requirements could prevent them paying a dividend.

    As I type this, it sounds so ludicrous, that I wonder if I have misunderstood it.

    Brendan
     
  19. Sarenco

    Sarenco Frequent Poster

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    Surely deposits constitute a liability rather than an asset, no?
     
  20. Brendan Burgess

    Brendan Burgess Founder

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    The member puts €100,000 in the credit union.

    There is a double entry in the Credit Union's books

    Debit Savings and Investments/bank €100,000
    Credit Members' shares €100,000

    So when the money is put into the credit union it becomes both an asset and a matching liability.

    The bizarre thing is that the Credit Union must set aside €10,000 for the asset which is the Credit Unions' bank account/savings/investments.

    Brendan