Irish Times: Credit Unions Face Serious Solvency Issues

Shocking is right, and this is just 1 CU.

A CREDIT union has had to be given access to €4.3m from a bailout fund after a spike in bad debt provisions, it has been confirmed.

Charleville Credit Union in Co Cork has been provided with the guarantee, with the money to be given to it if some of its loans are not recovered within two years.

A deficit of €5.5m was recorded after the union was forced to put aside extra provisions for bad debts, due to the severe drop in the value of properties which loans were secured against
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Ontour: Credit unionists implicit argument is people should leave their money on deposit with their local credit union so that it can in turn lend this to others in the community even where they will be not be paid interest on their deposit.

If a credit union cannot pay a dividend then it is an unsafe place to save as it cannot meet its obligations to savers which is to pay a reasonable rate of return for their money. In essence the "save and accept no dividend" argument is a recipe for moral hazard as the discipline to address problems by closing down or merging bad credit unions is absent. So you can run one into the ground and get away with it.

Why is the credit union unable to pay interest?

Poor governance and management is at the root of troubled credit unions. The only way to promote their continuing operation is through merging them with others that are better run. This is what happens in other countries. Either that or they are wound down. Cases of preserving credit union independence using new boards and management who have turned a credit union around are untypical as this process usually leads to chronically distressed operations.

The problem here is twofold: (1) Bad credit unions have been allowed to continue operating and (2) it's hard to merge as tight common bonds prevent a credit union in say town A being merged with one fifty miles away in town B - same is the case with employment based unions.

Credit unionists here are fond of saying no credit union has ever publically failed which means either Irish credit unions are better managed and governed than others or something else is at work. In truth Irish credit unions are not allowed to fail and are bailed out no matter what.

We are no longer dealing with small mom & pop outfits - the ones reported in the press and known of privately are medium to large full time staffed credit unions with assets over €60m with customer numbers over 20,000. Some are quite large with assets well over €200m. The tax payer exposure through the guarantee system is over €10bn - the top 22 credit unions account for 26% of this - the top 100 80%.
 
kaplan said:
Poor governance and management is at the root of troubled credit unions. The only way to promote their continuing operation is through merging them with others that are better run. This is what happens in other countries. Either that or they are wound down. Cases of preserving credit union independence using new boards and management who have turned a credit union around are untypical as this process usually leads to chronically distressed operations.
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Is this your personal experience, or is there any decent research on CU turnarounds? It seems just a tad defeatist to walk away from the problem. Why not just provide good governance and management?
 
kaplan said:
If a credit union cannot pay a dividend then it is an unsafe place to save as it cannot meet its obligations to savers which is to pay a reasonable rate of return for their money.
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The expectation is that credit union protects your savings, not paying a dividend this year may be the correct course of action to protect your savings in the medium/long term. If one credit union is prudent and does not pay a dividend and another continues to act recklessly and pay dividends, your approach leads to the money leaving the prudent credit union and flooding in to the reckless credit union. Good credit union collapses and in time so will the other one. Interest on your savings is important but if everyone takes a very short term view, consumers will be the eventual losers.

kaplan said:
Poor governance and management is at the root of troubled credit unions. The only way to promote their continuing operation is through merging them with others that are better run.
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If you ignore the current financial crisis, many credit unions do not have the economies of scale and skills to fulfill prudent financial regulatory and compliance practices, so reform and consolidation was needed even before the current problems. The main problem I see with consolidation is that it is usually bigger institutions absorb many smaller ones. I fear that it is many of the larger credit unions that engaged in 'more progressive' lending practices that are now in more trouble. This feeds an argument that the smaller credit unions are better as they did not lend large loans for speculative or investment purposes.

The answer is much more active regulation of the financial services sector paid for by the institutions. A regulator should be able to review the rules and practices of a financial institution and their implementation. The state needs to be involved in governance structuring, risk modeling and compliance enforcement and review. This will lead to a regulatory enforced change to credit union structures which the credit union movement is not capable of due to the political nature of credit unions and their representative organisations.
 
More serious trouble for credit unions ...

Credit union loan arrears rise to 14.9% by end of June

[broken link removed]

CREDIT UNION loans in arrears increased to 14.9 per cent of all loans by the end of June, the Irish League of Credit Unions disclosed yesterday.

The ratio increased from 9.4 per cent at same time last year. League chief executive Kieron Brennan said savings were pledged against 30 per cent of loan arrears.

Write-offs in the year to June were €66 million, or 1.03 per cent of all loans, compared with €51 million in the year to June last year.
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@complainer - there is ample evidence here of credit unions that have not managed to turnaround and continue in a distressed state, with new blood on board. The problem relates to an unwillingness and inability to practically remove an entire board and management - finding replacements is quite difficult.
UK experience is one where credit unions are either merged or closed - albeit the sector there has had unique problems.
The evidence from US NCUA/NCUSIF activity is that rehabilitation (new board & management) is not the chosen option but arrangements are made for a quick merger with another. The objective is to prevent runs and preserve service to customers. Because people realise their savings are guaranteed and service will continue they are not at all perturbed if their local credit union is merged with a better run operation.
@ontour you highlight a problem - joining small turkeys with a bigger ones just makes even bigger turkeys. If small credit unions are less risky - this is only because they no longer fulfil their purpose and have become "dysfunctional savings clubs" which brings up another problem as they are no longer credit unions but savings unions working as retail deposit gatherers for retail banks.

Credit union savings are not being mobilised to make good loans but are being channelled into the banking system which is not lending.
 
Getting rid of boards and management in their entirety is a ridiculous idea that the regulator is currently pursuing i.e. informing board members when they are up for election they are not to go forward for election. Some board members and management should go.
Credit unions over the past 10 years definietely lost the purpose of why they were set up for.
Merging credit unions in many cases is not a great idea and not possible in many situations as often neighboring credit unions are in the same problems as they pursued similar practices competing with one another. Often merging would only result in a weaker overall credit union that may not serve 2 groups of members.
Credit unions will see arrears rise in the coming years and even though the current SPS fund is a great idea, if the economy does not turn itself around in the next year which i doubt then it will start to be depleted and will itself be in trouble.
Credit unions must be left to trade their way our of a situation with the SPS only used as a guarantee. The regulator must not gain control of the SPS and credit unions should contribute more to the SPS within the coming year. Unfortunately not all credit unions are in the SPS.
Credit unions face a tough few years ahead, with the prospect of any dividend in many cases small - many lucky to pay .5%. With easy money of 3-4% available, many members will start to move their money elsewhere when they realise they are getting a small dividend again this year. The side effects of which could affect many credit unions.

Regards
Mike
 
From the Irish Times ...

The financial regulator also warned the State's credit unions are systemically underprovisioning against loan losses.

"We are finding systemically . . . underprovisioning in the credit union sector," Matthew Elderfield told the committee. "That's a worry to me."

Mr Elderfield said the regulator had discovered credit unions were underprovisioning by 40 per cent and that he intended on dealing with this problem.
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Regulator highlights worsening credit union loan arrears

Some quotes from the regulator made at the ERA meeting this week:

"There is severe pressure on the balance sheets of the credit unions. I want the boards and managers of the credit unions to examine their loan books in detail to discover whether they are performing, whether their provisions are correct, whether they will withstand stressed conditions and whether they need to reduce the dividends paid to members. The credit unions must be financially responsible."

"It is not just a matter of standing back and exhorting the credit union movement to do the right thing, which we will do. Our main responsibility is to check the position of the credit unions. In that context, we initiated a loan book review with which we have had outside assistance. I do not know the exact position but questionnaires, and so on., have been distributed."

"The evidence in this regards shows that credit unions are under-provisioned by 40%. The loan book reviews for the first 100 credit unions - I do not know whether reviews for all the credit unions have been completed - show that there is systematic under-provisioning among credit unions. That is a matter of concern and we must take it seriously. We will continue our work in respect of loan books and we will continue stress testing. We will work through the sector on a systematic basis and challenge credit union boards with regard to the quality of their loan books. We will also ensure that the level of provisioning has improved."

"The Deputy asked about the “little guy” and one of the main actions we can take for such a person is to ensure there are strong credit unions. It is precisely because credit unions operate in the common good, in the way they do, that we want to ensure their strength for the future. We have said in a number of meetings with credit unions and representatives of that sector that we are not seeking big or little credit unions but rather strong credit unions, regardless of size. That is a very important point."

"We have just finished a programme of going around the country meeting credit union representatives face to face. Some 400 people from the sector attended an event in Dublin last night. It is not quite at the Aviva Stadium level yet but it is a popular and worthwhile event for people to attend. As Mr. Elderfield noted, it is precisely because the unions are important that it is vital they remain strong. Mr. Elderfield gave the 40% figure and that is what we have seen after the initial tranche of loan book reviews, and we are aiming to complete 200 loan book reviews for the sector by Christmas. We will finish the remaining 214 books next year.
The 40% figure contains a multitude of sins and although some may be over-provisioning, others are woefully under-provisioned. This exercise is designed to allow us to target weaker credit unions. It is not factual that just because someone is a volunteer, he or she is not qualified to run a credit union. It is clear the future of the credit union movement will be as a voluntary institution. Some excellent and highly qualified volunteers already bring an awful amount to the sector. However, in the same way as there are people who need to be moved out of the banking sector, there are those who need to be moved out of the credit union sector for the good of its future. That is why we are pursuing this exercise while at all times being cognisant of how this is a special sector, important to the life of the country."
 
I have 75k in my local credit union. I have not been home in a while.
This thread has me a little worried. Is that justified?
 
Why do you have 75,000 EUR in the Credit Union? What return are you getting for your money? Do you have savings elsewhere?
 
foxyboxer said:
I have 75k in my local credit union. I have not been home in a while.
This thread has me a little worried. Is that justified?
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It depends how your local credit union is doing. Again I think €75,000 is far too much dosh to be tied up within one financial institution, it might be best to move some of it out into other banks.
 
Up to 15 credit unions face bailout in next three months

€45m of €125m bailout fund to be used ...

http://www.independent.ie/business/...ace-bailout-in-next-three-months-2403195.html

UP to 15 credit unions may need to be bailed out by a special rescue fund in the next three months, the president of the Irish League of Credit Unions told a private meeting at the weekend, the Irish Independent has learned.

This would soak up around €45m of the bailout fund run by the league.

The league, the largest representative body for credit unions with a €125m bailout fund, operates the Special Protection Scheme fund (SPS) to prop up ailing credit unions.
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Credit unions may need restructuring

[broken link removed]

The country's credit unions may need to be significantly restructured if arrears continue to rise and lending opportunities remain subdued, the recently appointed registrar of credit unions, James O’Brien, has warned.

Some credit unions lent aggressively during the credit binge and are now struggling during the downturn.

"Not all credit unions will make it through this difficult financial and economic environment in their current structure," Mr O'Brien told the National Supervisors Forum today.
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ILCU's goose is cooked as the game is up for its SPS?

Full text of what the regulator had to say is [broken link removed]. He's not pulling his punches in what is a robust warning to credit unions to get their act together. It seems the regulator may have been spooked by its stress tests and Grant Thorntons review of credit union financial stability - results from these came in after it published its stabilisation consultation document.

"with regard to stabilisation arrangements for credit unions trends emanating from the sector are suggesting that even greater reform may be required than those envisaged in our recent consultation paper."

The regulator is also concerned over risks of a contagious run. "If individual credit unions don’t face up to their current business difficulties they are risking their future and possibly that of the sector overall, given the indistinguishable nature of the credit union brand between credit unions and so the potential for contagion to spread."

It's abundantly clear ILCU's goose is cooked and one can imagine its senior officers rushing out to buy geriatric nappies. Skid marks on underpants springs to mind.

Still people have been well warned of serious trouble emerging - it may be only a matter of time before a big one causes a run. All eyes will be on some quite large operations that showed extreme stress last year.
 
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