CREDIT UNIONS have hundreds of thousands of members and billions of euro in assets divided evenly between investments and loans. Over the last decade the credit union movement has expanded rapidly and, unsurprisingly, the economic downturn has placed some member unions under financial pressure.
Last year the Financial Regulator, concerned about the financial stability of 10 of the 414 credit unions, closely monitored their operations. Mitchelstown Credit Union, in particular, was ordered to cease business lending and to curtail other lending. There, some members withdrew their savings while others questioned the security of their deposits. Worryingly, a Central Bank official told an Oireachtas committee last May that 20 credit unions had “serious” solvency issues.
On foot of a request by Minister for Finance Brian Lenihan, the Central Bank and the Financial Regulator have appointed Grant Thornton to carry out an independent review of the credit union sector. The first step will be to establish its financial position and risk profile. Chief executive of the Irish League of Credit Unions Kieron Brennan has acknowledged that up to 13 per cent of the €6.8 billion lent to customers are bad debts, a higher rate of default than that of banks on their mortgage loans. In addition, a number of credit unions are facing substantial losses on investments, most notably on bonds sold by stockbrokers that remain the subject of legal dispute.
Even so, credit union members need not be unduly concerned about the safety and security of their deposits. For these are covered under the State’s deposit guarantee scheme on the same basis as other qualifying financial institutions. Credit unions – unlike the banks – have a savings protection scheme in place, which is owned and operated by the credit union movement. And, again unlike the banks, credit unions have not needed taxpayers’ money to bail them out.
Nevertheless, the case for a major strategic review of the operations of credit unions is compelling. First, the financial position and risk profile needs to be clearly established. Second, a better legislative and regulatory framework is required to support and sustain a stronger credit union sector. As Registrar of Credit Unions James O’Brien has said, the review presents the movement with an opportunity to develop a robust and sustainable business model. And credit unions must accept the need for radical change, both in how they operate and how they are regulated.