'Significant' funds needed to restructure credit unions

THE RESTRUCTURING of the credit union movement will require significant funding, including State funding, but the amount required will not be known until the restructuring process gets under way, according to the Commission on Credit Unions report.

Suggested potential sources of funding are: available excess capital from participating credit unions; the wider credit union sector; and exchequer advances provided on a recoupable basis.

Under the framework outlined, a restructuring board will be established “as soon as possible” and an operational team will begin engaging with credit unions.

Only when the credit unions that are participating in the restructuring process have been identified and their proposals assessed, will it be possible to estimate how much funding will be required.

For instance, the merger of three large and well-financed credit unions might not require any funding at all, while the merger of two credit unions with inadequate reserves with an “anchor” credit union that is in a strong position, would.

“Funding will be needed to ensure that the restructured credit union has sufficient financial resources to remain stable and independently viable into the future,” according to the report.

“Further support may be needed to upgrade systems and controls, provide technical assistance and to provide post-restructuring support.”

The report said it will be important that sectoral resources are not drawn upon to the extent that the cost of restructuring is destabilising. At the same time, exchequer resources are scarce and it is important that moral hazard and State aid issues are avoided, according to the report.

Where funding is involved, proposals would need to be endorsed by the restructuring board before being submitted to the Minister for Finance for final approval.

The timeline included in the report envisages restructuring being completed by the end of 2014 with post-restructuring support continuing through 2015.

The commission envisages a “three-tier” arrangement for credit unions, with those having assets of less than €10 million, those having between €10 million and €100 million, and those having more than €100 million, being treated differently.

“A tiered regulatory framework is recommended, with less onerous requirements for those operating on a small and simpler scale, and capacity for credit unions to operate a more sophisticated model with regulatory safeguards to match.”

Likewise, new governance standards, that are to be established and phased in over time, will be “calibrated according to the size and complexity of the credit unions to which they apply”.

There are 404 credit unions in the Republic with about three million members and assets of about €14 billion. The chairman of the commission, Prof Donal McKillop, indicated yesterday that he expects extensive consolidation in the sector as a parallel development with an increased level of services coming on offer.

The sector is under stress as a result of the ongoing downturn, although it is worth noting that the credit unions are doing much better than our banks.

Loan arrears in the sector are now reported to be €1 billion, according to the commission, though provisions are about €800 million.

The Central Bank has projected that there will be a further deterioration in credit union solvency, the commission noted.

“While the financial challenges now faced by credit unions are evident, they are not insurmountable but do reinforce a clear need to reform how credit unions are structured, governed and regulated. A strengthened and re-vitalised sector can be in a position to play an increasing role in the retail financial landscape,” it said.

Changes To Credit Unions

What is happening to our credit unions?

They are about to have the biggest overhaul in their history.

Why?

Nearly 60 per cent of people in Ireland are members of at least one credit union. All told there are 403 credit unions offering savings and loan facilities to millions of consumers, but despite their enduring popularity, they have struggled in the face of the financial crash and, like the banks, they are dealing with growing levels of default and arrears.

How bad is it?

The credit unions are certainly not as badly off as the banks. Having said that, some of them do not have enough capital to function properly. All told there were 51 credit unions with less than the required levels of reserves – 10 per cent of assets – at the end of 2011. Of the 403 unions, 25 were found to be “seriously undercapitalised”. Across the sector, loans in arrears are estimated to be about €1 billion.

So what is being done to help them? More bailouts?

Thankfully, no. Last summer the Government set up a commission to review their future and to recommend how it could be protected. Chaired by Prof Donal McKillop of Queen’s University Belfast, it was asked to take into account the sector’s not-for-profit mandate, volunteer ethos and community focus, while examining the protection of depositors and financial stability. Its final report, issued yesterday, was described by Minister for Finance Michael Noonan as a “fundamental turning point in the development of the credit union movement in Ireland”.

What action does the commission recommend?

Its key finding is that the credit union movement needs to be dramatically restructured over the next four years. Credit unions which are weak and in danger of insolvency will voluntarily merge with stronger ones. A new body, the Credit Union Restructuring Board, is to be established to engage with credit unions and facilitate the process.

What will the restructuring process mean?

As a result of the mergers, the number of credit unions could fall by as much as 50 per cent.

What other changes will we notice?

Credit unions capable of operating on a more sophisticated basis will be allowed to offer a wider range of products and services and will be allowed to engage in a broader range of lending and investment activities.

Anything else?

The commission recommended a tiered system of regulation with varying levels of control being exerted on institutions. Larger, more sophisticated credit unions will have to have more stringent safeguards. There will be new rules on minimum competency levels and probity for staff, but the commission has stressed the credit unions’ hallmark of volunteerism will remain in place.

What happens next?

During the restructuring, the Central Bank is likely to operate a stabilisation fund for viable but undercapitalised unions. New laws to cover the main commission recommendations will published in June.