Existential Threats to Credit Unions

WizardDr

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1,239
Central Bank of Ireland Regulations for Credit Unions are like quick drying cement whilst delivering, it creates the impression of constructive action called 'structures' 'accountability' 'risk & compliance' but when it sets and is evidently wrong the structure remains in place though it makes delivery of the original stated project - to strengthen and sustain the 'sector' -much more difficult.

First the CBI cannot ever admit it is wrong which makes the removal of cement much more difficult. Second it either creates a deliberate or unintended blockage on changes that make sense. Worst of all there is difficulty challenging the Central Bank, It is easy to find breaches of blanket regulations when they cover so many areas. So a Credit Union wont challenge the Central Bank unless in a pack. The problem is that the representative bodies provide some shared processing services and there is a race on to dominate the mortgage agenda and having processes like,mortgage origination and mortgage servicing outsourced. This to me will mean the local Credit Union does not take an active art in putting the mortgage together - this raises a question on the fundamental relationship with the Credit Union. Some feel that Credit Unions cannot manage mortgages. FACT: 83 provided mortgages of some sort on which modified TRS was claimed y/e 31/12/2015.

The 10% Reserve Ratio is fake because the equivalent ratio is 3% for Banks. Do not take my word for it. Do the calculation of what the ratio is for 'Total Assets' as opposed to 'Risk Weighted Assets.' Banks would not pass the Reserve Ratio test anywhere. Then ask your selves what figure is 'right'.

If the Credit Union attracts too many share or deposit balances the equivalent funds are an asset. No matter what asset they have they must still have 10% reserve ratio. This is a block to growing shares or deposits as any expansion in the assets will see the ceiling being reached and its almost like the end of the world when in fact a ratio of 4% would have saved Bank of Ireland. Of course 10% is better than 4,5,6,7,8, or 9%. In fact it is 250% better with less complex assets. The arrival of Covid-19 has seen consumers increasing savings and there was immediate pressure on credit unions and they virtually all restricted or had already restricted the level of savings despite being the most trusted brand - that it might be but in the mind of Central Bank. This is nonsense. And the damage the ratio will cause is severe. You cannot grow your loans unless you substitute existing assets -so growing the lending book is required.

The only way to increase the reserves now is by profits. The sneaky Central Bank removed the possibility of the Credit Union issuing debentures (a charge on fixed assets) which not a single Credit Union issued - and this type of capital could have been used by Members who were prepared to have risk capital - because the Central Bank for its own purposes has treated shares as deposits for all intents and purposes.

The only real asset that members might be interested in is a Buy to Let as an augment to their Pension. This type of lending was blocked. It is now regarded as too risky and beyond a Credit Union's ability - it was simply killed off before it began. There are issues with Buy to Lets - high tax bills and a more friendly basis for S110 firms where there seems to be a much lighter regulatory regime. Is this type of lending complex if LTV is set and an income test completed? Why is there no effective lobbying by representative bodies on this?

The expected wipe out of €500m in losses didn't arrive at Department of Finance door despite the proclamation by the Central Bank that disaster was around the corner. But the Central Bank has not been challenged on how or who produced the case for toughening up on the Credit Unions. To use the Revenue language it was bogus.

There is also a restriction on home loan lending regardless of the LTV and all that. The limits are too low and they reflect paranoia or deliberate ignorance at just how good the shared services such as IT and Payments have been. Credit Unions formed PAYAC - why was this needed if you had two representative bodies?

Lending demand is now collapsing. Investment returns are closing in on zero. Yet the State does not make it easy - why have the Credit Unions not got direct access to NTMA to place surplus funds?

Therefore we are at a fundamental fork in the road. Low returns on investments. Caps on Savings; Lending demand stalling. A non responsive representative structure and a Regulator that has overcooked the goose.
 
Last edited:

Pinoy adventure

Registered User
Messages
168
You cannot grow your loans if the loan book is closed.every week I go into my credit union too deposit money and every week I see there posters "our loan book is open" the big 5 loans,20k/40k/60k home improvement loans etc
Yet the refused me a loan because they don't do mortagages.
I was only looking for >€25,000.

I would still rather borrow money than take out my savings in the CU but Brendan got me thinking about there practices on there loans.
 

WizardDr

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Messages
1,239
@Pinoy adventure
Credit Unions are able to do mortgages, your particular one might not. Which one?
You may qualify to be a member of another credit union through having a 'common bond' connection such as where you used to live; work; partner; or where you live.

Some of the bigger ones like Health Services have a full range of products including mortgage.

Wb
 

Protocol

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Messages
3,175
Every week my local newspaper has ads from several CU, with loan rates at typically 6.9% +.

If PCP rates are from 0%, why aren't the CU competing?

Even 4.9% would be good.

They earn a negative return on corporate deposits with banks, and maybe 0%-1% by buying Govt bonds.

Why not compete against PCP, and earn maybe up to 5%, albeit with default risk.
 

WizardDr

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1,239
Comparing a PCP with a personal loan
The main difference between a PCP and a personal loan is that with a personal loan you borrow the money, pay for your car, and own it immediately. With a PCP you don’t own the car: you are essentially hiring it for an agreed period of time, typically three years. You only own it if you pay the GMFV (Guaranteed minimum future value.)This is important because if you run into financial difficulty during your agreement you wouldn’t be able to sell the car unless you had permission from the finance company – as they are the legal owner of the car.

Personal Contract Purchase (PCP) – can be good if you want to get a new car every few years, otherwise a hefty final payment and often more expensive overall than a loan. A popular way to get a new car, especially if you frequently change car and want to pay for it monthly.

I do not think the Credit Unions explain this properly.
 

24601

Frequent Poster
Messages
220
Central Bank of Ireland Regulations for Credit Unions are like quick drying cement whilst delivering, it creates the impression of constructive action called 'structures' 'accountability' 'risk & compliance' but when it sets and is evidently wrong the structure remains in place though it makes delivery of the original stated project - to strengthen and sustain the 'sector' -much more difficult.

First the CBI cannot ever admit it is wrong which makes the removal of cement much more difficult. Second it either creates a deliberate or unintended blockage on changes that make sense. Worst of all there is difficulty challenging the Central Bank, It is easy to find breaches of blanket regulations when they cover so many areas. So a Credit Union wont challenge the Central Bank unless in a pack. The problem is that the representative bodies provide some shared processing services and there is a race on to dominate the mortgage agenda and having processes like,mortgage origination and mortgage servicing outsourced. This to me will mean the local Credit Union does not take an active art in putting the mortgage together - this raises a question on the fundamental relationship with the Credit Union. Some feel that Credit Unions cannot manage mortgages. FACT: 83 provided mortgages of some sort on which modified TRS was claimed y/e 31/12/2015.

The 10% Reserve Ratio is fake because the equivalent ratio is 3% for Banks. Do not take my word for it. Do the calculation of what the ratio is for 'Total Assets' as opposed to 'Risk Weighted Assets.' Banks would not pass the Reserve Ratio test anywhere. Then ask your selves what figure is 'right'.

If the Credit Union attracts too many share or deposit balances the equivalent funds are an asset. No matter what asset they have they must still have 10% reserve ratio. This is a block to growing shares or deposits as any expansion in the assets will see the ceiling being reached and its almost like the end of the world when in fact a ratio of 4% would have saved Bank of Ireland. Of course 10% is better than 4,5,6,7,8, or 9%. In fact it is 250% better with less complex assets. The arrival of Covid-19 has seen consumers increasing savings and there was immediate pressure on credit unions and they virtually all restricted or had already restricted the level of savings despite being the most trusted brand - that it might be but in the mind of Central Bank. This is nonsense. And the damage the ratio will cause is severe. You cannot grow your loans unless you substitute existing assets -so growing the lending book is required.

The only way to increase the reserves now is by profits. The sneaky Central Bank removed the possibility of the Credit Union issuing debentures (a charge on fixed assets) which not a single Credit Union issued - and this type of capital could have been used by Members who were prepared to have risk capital - because the Central Bank for its own purposes has treated shares as deposits for all intents and purposes.

The only real asset that members might be interested in is a Buy to Let as an augment to their Pension. This type of lending was blocked. It is now regarded as too risky and beyond a Credit Union's ability - it was simply killed off before it began. There are issues with Buy to Lets - high tax bills and a more friendly basis for S110 firms where there seems to be a much lighter regulatory regime. Is this type of lending complex if LTV is set and an income test completed? Why is there no effective lobbying by representative bodies on this?

The expected wipe out of €500m in losses didn't arrive at Department of Finance door despite the proclamation by the Central Bank that disaster was around the corner. But the Central Bank has not been challenged on how or who produced the case for toughening up on the Credit Unions. To use the Revenue language it was bogus.

There is also a restriction on home loan lending regardless of the LTV and all that. The limits are too low and they reflect paranoia or deliberate ignorance at just how good the shared services such as IT and Payments have been. Credit Unions formed PAYAC - why was this needed if you had two representative bodies?

Lending demand is now collapsing. Investment returns are closing in on zero. Yet the State does not make it easy - why have the Credit Unions not got direct access to NTMA to place surplus funds?

Therefore we are at a fundamental fork in the road. Low returns on investments. Caps on Savings; Lending demand stalling. A non responsive representative structure and a Regulator that has overcooked the goose.
Ah the old, "the Central Bank is to blame for all our woes" chestnut. The Registry of Credit Unions is, by many measures, a poor enough regulator but the majority of issues in the sector are a direct result of poor governance and strategy on the part of credit unions over a long period of time.

The key issue for the sector is that it can't lend out enough of the money it takes in - that's it! This isn't the Central Bank's fault. The Central Bank isn't to blame for the sector having a 25% to 30% loans to asset ratio, credit unions are. That failing is what has exposed the sector to interest rate risk and it has been a problem for many years. Indeed, the last time the sector had a "healthy" loans to asset ratio relative to what it is today was because it was fueling the Celtic Tiger credit bubble.

The reserve ratio is somewhat of a red herring. Indeed, most credit unions were operating with a buffer of 5 or 6% going into this crisis, so the retention of surpluses hasn't been a problem in recent years - indeed most boards have embraced it and recognize capital adequacy as their biggest strength. Also, 10% is the minimum requirement, but no credit union has been liquidated unless they have fallen way below this requirement. These credit unions have generally been in receipt of SPS funding too, so they were already failed or on the way to failure anyway.

There also appears to be a distinct lack of appreciation of the risks associated with such small institutions getting involved in mortgage lending, with very little consideration given to loan book concentration and the economies of scale needed to operate in this market. With around 19bn in assets, the sector is about the same size as PTSB. However, unlike PTSB, this asset base is split 245 different ways. Your average credit union has €77.5m in assets. How much scope does an institution of this size really have for mortgage lending that is on-balance sheet?

Your observation in relation to buy-to-lets further betrays a serious misunderstanding of credit risk. Credit unions shouldn't be involved in BTLs. There are plenty examples of credit unions that did BTLs during the Celtic Tiger years and the results were not pretty.

Also, it's absolute nonsense to be comparing capital requirements for banks with credit unions but I'm not sure that's even worth getting into when the basic premise of the OP is that the CBI is the big bad wolf.
 

NoRegretsCoyote

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1,709
There also appears to be a distinct lack of appreciation of the risks associated with such small institutions getting involved in mortgage lending, with very little consideration given to loan book concentration and the economies of scale needed to operate in this market. With around 19bn in assets, the sector is about the same size as PTSB. However, unlike PTSB, this asset base is split 245 different ways. Your average credit union has €77.5m in assets.
Agree completely.

There are only 55 credit unions with assets of over €100m.

Even at €100m I can't see how mortgage underwriting would make economic sense, asset base would need to be 3 or 4 times that. And presumably there are maybe a dozen CUs with that kind of asset base.

It will probably work for some, but isn't a panacea for the sector
 

Brendan Burgess

Founder
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41,833
Excellent post 24601 - it should be sent out to the boards of the 245 different credit unions.

The good Doctor is right about one thing - the Credit Unions face an existential threat. But it's not from the Central Bank. And the Credit Unions will not be able to face up and solve their existential threat until they focus on the real problem and stop getting hung up on the Central Bank.

If the Central Bank did what the Wizard wants them to do, would it make any difference to the viability of credit unions?

Brendan
 

Brendan Burgess

Founder
Messages
41,833
It will probably work for some, but isn't a panacea for the sector
I think that they need to set up a mutual building society. Then they should tell their depositors to withdraw their money and put it on deposit with the CUBS.

But I don't know how they would overcome the problem of capitalising the Building Society.

The Central Bank does not like small financial services companies. And with the Credit Union's record of compliance, they would be very slow to authorise a new building society. Which is a pity.

And it would have to operate completely independently. They could not have the lending decisions influenced by lobbying from local credit unions.

Brendan
 

RichInSpirit

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897
Credit Unions were more important in the past when banks wouldn't lend to the "poorer" people. Their loan interest rates were very competitive at the time, at 12% per annum compared to 19% or 20% for a Bank loan in the 1980's.
At the moment they are probably a victim of the times, with very low interest rates being available in the banks.
I don't wish to see their demise though as they may be very necessary again at some point in the future if interest rates go astronomical again.
 

24601

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Messages
220
Excellent post 24601 - it should be sent out to the boards of the 245 different credit unions.

The good Doctor is right about one thing - the Credit Unions face an existential threat. But it's not from the Central Bank. And the Credit Unions will not be able to face up and solve their existential threat until they focus on the real problem and stop getting hung up on the Central Bank.

If the Central Bank did what the Wizard wants them to do, would it make any difference to the viability of credit unions?

Brendan
Alas, that would be a futile exercise. Assuming the average board has 9 directors, that's 2,205 directors (with about 4,410 opinions!). I've provided advice to credit union boards and it's next to impossible to get 9 directors to agree on a course of action when faced with an existential threat. Imagine if the board of PTSB had over 2,000 directors? The tracker scandal would be the least of their worries.

If the Central Bank did what Wizard wants them to do the viability of the sector would be even more troubled than it already is. We'd have plenty of small credit unions with volunteer boards, incompetent management teams and diluted capital chasing BTL loans in an attempt to address their viability issues. Also, another issue that I haven't really seen discussed anywhere is the risk appetite of credit union boards to repossess a family home. It's one thing for the big bad, faceless, bailed-out bank to enforce their security, it's quite another thing for a community co-operative based in a small, defined geographical area to try repossess a family home associated with a NPL, and as such, I've always viewed CU mortgages as closer to being unsecured lending, and this is in a country where it's next to impossible to repossess a family home.
 

Brendan Burgess

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41,833
it's quite another thing for a community co-operative based in a small, defined geographical area to try repossess a family home associated with a NPL,
Which is why I think it might work with a CUBS.

Though oddly enough, the Credit Unions are not behind in pursuing defaulters.

They had a lot of people jailed when it was allowed.

Their attitude was "It's our money and we want it back."

Brendan
 

24601

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Messages
220
Which is why I think it might work with a CUBS.

Though oddly enough, the Credit Unions are not behind in pursuing defaulters.

They had a lot of people jailed when it was allowed.

Their attitude was "It's our money and we want it back."

Brendan
Maybe there's a greater moral imperative to chase defaulters since they're effectively impacting their immediate neighbours in their communities by not paying?
 

NoRegretsCoyote

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1,709
Maybe there's a greater moral imperative to chase defaulters since they're effectively impacting their immediate neighbours in their communities by not paying?

All the stories of mortgage arrears and default on the banks involve borrowers getting through to a different person in a call centre every time and no point of contact for resolution.

I would imagine a typical credit union would be more focussed in dealing with someone in arrears. You would probably get the same person picking up the phone every time.
 

WizardDr

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1,239
I cannot get BB off the high stool on the blunt nature of the 10% Reserve Ratio.
This ratio was made up.
 

24601

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Messages
220
I cannot get BB off the high stool on the blunt nature of the 10% Reserve Ratio.
This ratio was made up.
Every reserve ratio is "made up". If there wasn't such a high reserve requirement for credit unions the number of failures would probably be far greater. Blunt and all as it is, the application of the requirement has resulted in the sector entering this crisis in far better shape than the last time around. There are far fewer credit unions at risk of failure now, and that's nearly exclusively because of their current reserve buffers. Perversely, the level of capitalization has probably created a level of inertia from a business model development perspective.

You seem to be obsessed with the reserve requirement and completely oblivious to the core failing of the sector: it can't lend enough money. It is excessively exposed to environmental risks because the core of the business is weak, not because of any prudential requirement. The loans to assets ratio will probably fall to ~20% in the next year - 20% for what are supposedly "credit" unions?
 

Cavanbhoy

Registered User
Messages
15
Involved in a Cu small town. mortgages are unrealistic. Loanbook growing year on year from a low base 2014. Problems are torn between been a bank in all but name or a community lender. Provide valuable credit to members at reasonable rates to members who wont get loans from banks. Cost base very high.
 
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