Central Banks new rules for long term lending by Credit Unions announced

Brendan Burgess

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Press Release - 21 November 2019

New Lending Rules to come into force for Credit Unions


· Central Bank issues regulations to allow credit unions undertake increased longer term lending, including home mortgage and business lending

· Further additional capacity to be extended to larger, stronger credit unions who meet certain requirements

· Changes will take effect from January 2020

In October 2018 the Central Bank launched CP125 - Consultation on Potential Changes to the Lending Framework for Credit Unions to seek feedback on proposed changes to the lending framework for credit unions. The Central Bank is publishing the responses received to that consultation alongside a Feedback Statement.

Following a review and public consultation, the Central Bank issues new lending measures for credit unions that will come into effect in January 2020. Changes will include the removal of the existing lending maturity limits which cap the percentage of credit union lending which may be outstanding for periods of greater than 5 and 10 years. Maturity limits will be replaced by new concentration limits, on a tiered basis, for home mortgage and business loans, expressed as a percentage of total assets.

These changes provide those credit unions with the financial strength, the competence and the capability, the flexibility to undertake increased longer term lending, including home mortgage and business lending.

There are three tiers under the changes as follows:


· A combined concentration limit for house and business loans of 7.5 per cent of total assets for all credit unions.

· A 10 per cent limit, conditional on a credit union satisfying asset size (at least €50 million) and regulatory reserves qualifying criteria and notifying the Central Bank in advance.

· A 15 per cent limit for credit unions with total assets of at least €100 million, subject to Central Bank approval.

Registrar for Credit Unions, Patrick Casey, said

“The changes being announced today follow a comprehensive review of the lending framework for credit unions. This forms part of our commitment to ensuring a responsive regulatory framework. It is important that the lending framework remains appropriate for credit unions taking account of their risk management, capabilities, expertise and financial resilience.

We are introducing these changes so that credit unions will have greater flexibility to engage in longer term lending, including home mortgage and business lending, to support increased diversification in credit union lending. The proposals are grounded in the Central Bank’s statutory mandate, which is to ensure the protection by each credit union of the funds of its members and maintenance of the financial stability and well-being of credit unions generally. Where credit unions wish to undertake increased house and commercial lending, it is important that they understand the risks involved.

The amending regulations represent significant and fundamental structural framework changes, providing sufficient capacity and flexibility to enable safe and sound business model transformation on a sustainable basis serving members’ long term interests.”

Further changes in relation to the removal of the existing longer term lending maturity limits, the new maximum maturity limits for secured and unsecured lending, and the definition for business loans are outlined in the Feedback Statement.

ENDS
 

Brendan Burgess

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Why would housing loans and business loans be put into the same category? Surely the risks and terms are very different?

And it seems like a form of blackmail to make the smaller credit unions merge.

"You can stay small if you want to, but you can't lend out more than 7.5% of your total assets to these categories"

Why is it based on total assets rather than on the size of the loan book? Would that not discourage CUs from reducing the amount they have in members' shares which is what they should be doing.

Brendan
 

NoRegretsCoyote

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Why would housing loans and business loans be put into the same category? Surely the risks and terms are very different?

And it seems like a form of blackmail to make the smaller credit unions merge.

"You can stay small if you want to, but you can't lend out more than 7.5% of your total assets to these categories"
Exactly.

Hard to see much of this lending for small credit unions. There are overheads associated with this kind of mortgage and SME lending in terms of risk management, internal controls, etc and the volumes wouldn't be big enough for small credit unions.

I guess if this proves a success then the limits could be increased by the Regulator over time.
 

TheJackal

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Response by Irish League of Credit Unions is here


The new regulations will allow credit unions to become more significant players in the residential mortgage market through CU Home, the ILCU’s new standardised, residential mortgage solution. Credit unions should be granted still more leeway to serve this market, and so while today’s amendments are welcome, they do not fully enable us to develop diversified loan portfolios at the required scale.
 

24601

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This is bizarre. Under the new framework the following is now theoretically possible:
  • A credit union could have €100m in assets. Once it has €12.5m in reserves it could have a tiny loan book of €10m that is made up exclusively of 40 x 250k mortgages.
Also, as noted by others, any credit union with assets less than €50m will be encouraged to increase their assets by taking in deposits they can't lend out and have to increasingly pay other institutions to keep. Credit Unions that hit their limit as a % of their assets will also now be incentivised to do the same. Ticking time bomb.

If the credit unions have ~20bn in deposits but can only lend out 30% of this, they should use the remaining €14bn to set up their own mortgage provider and take this business off the balance sheets of tiny institutions.
 
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