When finally written up, the management of Ireland’s banking crisis will become a classic case study. No one knows how deep it will run or how much it will eventually cost. More importantly no one knows if we can afford to pay back all that’s been borrowed by banks to fund the credit boom. Officially it’s said to be economically affordable but at what cost to society?
International precedents are useful if only to understand the sheer scale of the inevitable costs to society of banking crisis. Since 1945 numerous national banking crisis have caused deep and prolonged recessions. On average real property prices declined by 35% over a 6 year period, economic output declined by 9% and unemployment rose by 7% with equity values collapsing by 50%. What’s more public debt rose by 86%. Only a portion was spent on banking bail out costs. Most of the money was spent on government economic recovery programmes. These are average figures – Ireland’s experience is already a lot worse.
The modern bad bank option was first developed in the US during the 1980’s Savings & Loans crisis when rogue bankers brought the house down. The Americans used a resolution regime to take over the banks, sell off the good bits, close errand institutions with the tax payer picking up the bill for recovering bad loans. Today vast tracts of land with ghost housing estates stand in silent witness to the greed and hubris that drove US S&L’s to the wall.
Later still Nordic countries Norway, Sweden and Finland faced with an imploding property bubble, mainly commercial property, took somewhat differing approaches. Sweden, copying the US model, nationalised two of its big seven banks, splitting the banks into a good bank and a bad bank. Norway left its main banks to their own devises, refusing to capitalise them until they had forced their bond holders to bear losses. Both countries ended up owning banks, which when finally re-privatised paid most of the tax payer’s money back. Both states retained strategic shareholdings in the rescued banks. Costs were contained only as the problem was not as large as it here.
Comparisons with the US, Swedish and Norwegian experiences are relevant here only to understand the two generic options – nationalise first and use a bad bank to wind out bad loans or first let private banks take the hit and then recapitalise them as good banks.
The sheer relative size of Irish banks exposure to property lending and absence of a bank resolution regime which would have allowed for the ordered take over of troubled banks, left the state with a dilemma. The banks are both too big to fail and too big to bail out. It’s an unresolved dilemma that elsewhere has led other states to default on guarantees provided to banks.
The term “zombie bank” was coined for banks starved of capital unable to generate new loans off their shattered balance sheets. The very same has happened here. Not only are the big banks in serious trouble but all banks including credit unions are facing a second round of bad debts as consumer and business loans sour. NAMA, is only designed to cover losses on €90bn of loans; what of losses on €180bn consumer loans and billions owed by small business owners? How are banks going to fund these loan losses?
Higher regulatory capital requirements announced yesterday will force banks to shrink their balance sheets, allocate capital to low-risk investments, eschew lending and increase prices to rebuild capital. Nama should have been a side show to the main event – the creation of a good banking system that works. But nothing is being done to build good banks and can’t be until all boom time losses are ring fenced, fully recognised and written off.
We need a working banking system but we do not need the current crop of banks? This has been all too obvious question since 2008. Other countries have allowed banks to fail and have survived and thrived after a time. It is not the end of the world to draw a line in the sand and decide that citizens will not be impoverished for a generation even if economically affordable.
Anglo Irish Bank’s questionable status as a “systemically important” bank is finally being defined in its
write-off bill. And the full extent of systemic risk inherent within the domestic financial service system was exposed yesterday through the Quinn Insurance administration. As an insurer’s solvency is as important as banking capital, the state may have to provide capital to a systemically important general insurer.
Far from being over the banking crisis is widening and deepening. At what point can we do the final sums and figure out what we can realistically afford to pay and write off the rest?
A version of this article appeared in the Irish Examiner, Business Section, Wednesday 31st March 2010
Wednesday, March 31, 2010
Monday, March 29, 2010
Efforts must now be made to solve the shattered home mortgage market
A negative equity loan reduction programme is vital, says Bill Hobbs
A homeowner negative equity loan reduction programme is an inevitable consequence of the property bubble. Instead of temporarily reducing repayments to affordable levels until income “improves” and property prices “recover” there is a need to face up to the brutal facts. Tens of thousands are exposed to a permanent reduction in income and long term negative equity. People can no longer afford or are willing to repay loans used to buy grossly overpriced houses which are now worth half what was paid for them.
Unable to sell, people with negative equity are trapped within a broken mortgage market, cannot refinance at better rates and are at the mercy of banks increasing their loan margins. Labour mobility has declined due to negative equity, which is also severely impacting economic activity as people stop spending, pay down debts and increase precautionary saving.
Negative equity doesn’t cause loan defaults but is a necessary condition for loan defaults. And there are two forms of homeowner default – where someone is unable to pay and where someone is unwilling to pay anymore. For many people it would be better for them to walk away from their house, rent and start saving for a new one – their equity if they ever had any, is gone and they are paying a higher rent through loan repayments than they would if they rented a house. Called “strategic” default it happens when people figure it’s cheaper to rent than pay a mortgage. It’s a recognised rational phenomenon in the US and one which is also becoming a feature here. While an Irish bank may theoretically sue for the balance owing after it’s sold a house, it’s practically impossible to recover the money.
Short selling, where borrowers agree to sell their home and the bank agrees to accept the proceeds and write off the negative equity, is also quite common in the US. Talk there is of a negative equity resolution programme to force banks to write down loans to current house values. Its proponents say that “cramming down” loans in this way should leave the homeowner with some equity ownership in their home.
Here in Ireland nothing concrete has been done to make family homes more affordable or to address negative equity. Nor has there been any investigation into what went so badly wrong with the consumer mortgage market. The entire focus has been on stabilising the banks – the NAMA project. Its debt forgiveness bill for underwater land and property development loans amounting to tens of billions will be unveiled this week. Not a single scrap of official paper exists to estimate the scale of household negative equity. Not one official line has been printed on how to fix the shattered home mortgage market.
Instead there’s been a crisis response allowing for loan modifications at the discretion of the lender. A homeowner may be protected against repossession for a limited period of time, but they have no right to renegotiate or modify their loan. Banks are playing ball as they know repossessions are not on – they cost too much and would backfire in depressing the housing market even further. They also know that formally calling in loans will trigger loan losses they cannot afford. Yet loan forbearance – putting things off – worsens negative equity as costs are eventually capitalised and loans become even more unaffordable.
The Americans stopped talking about the problem long ago. They have two schemes targeting 10m at risk homeowners. One called HARP which refinances and insures loans at lower rates is aimed at reducing loan repayments. The other called HAMP is aimed at modifying loans so repayments fall to below 31% of household gross income. But take-up has been dismal as modifications are at lenders discretion. British schemes are also foundering as banks have the discretion to say no to loan modification.
Discretionary programmes fail to address the fundamental issue – without writing down some of the debt owing, people are left worse off, owing more then they started with. Talk is now switching from debt forbearance to debt reduction modifications that write down the amount owing to less than the open market value of the home leaving the homeowner with some equity with which to move on. This thinking takes into account the need for people to retain some sense of ownership, invest in maintaining their home and be able to sell and move on.
How bad is the problem here? Sparse data indicates there are about 790,000 consumer loans secured by houses, with attached borrowings of €147bn. About 640,000 households owe €118bn on their homes. And of these, if the collapse in prices drops to 50% this year, one in three will be in negative equity including 125,000 first timers. Negative equity would be €7.4bn, on average €38,000 per household. But this is an average. The true extent of negative equity is much worse for those who borrowed at high LTV’s over 30 years. A third of all loans issued in 2007 where for 100% finance. Many more were topped up with unsecured loans from credit unions and others. Over 25,000 are in serious default, 30,000 have negotiated forbearance and 20,000 are on mortgage interest subsidies. These are the loans in trouble – there are no estimates for those at risk of default. With 440,000 people unemployed and many more suffering permanent reduction in income the impact of negative equity and its capacity to undermine economic recovery is barely in understood.
A standardised regulated rules based approach to modifications should be introduced requiring all lenders to include for permanent reductions in principal to align mortgage debt to property values. These should be negotiated as early as possible even before a delinquency occurs. In addition, if mortgage debt is to be included in a personal insolvency regime then its enforcement officers should be allowed to modify the mortgage (downwards) to achieve an affordable repayment tied to property value today and not some assessment of likely future value. Consideration could also be given to from of negative equity certificate that could be used as a future claw back of the loan amount reduced.
A version of this article appeared in the Irish Examiner, Business Section, Monday 29th March 2010
A homeowner negative equity loan reduction programme is an inevitable consequence of the property bubble. Instead of temporarily reducing repayments to affordable levels until income “improves” and property prices “recover” there is a need to face up to the brutal facts. Tens of thousands are exposed to a permanent reduction in income and long term negative equity. People can no longer afford or are willing to repay loans used to buy grossly overpriced houses which are now worth half what was paid for them.
Unable to sell, people with negative equity are trapped within a broken mortgage market, cannot refinance at better rates and are at the mercy of banks increasing their loan margins. Labour mobility has declined due to negative equity, which is also severely impacting economic activity as people stop spending, pay down debts and increase precautionary saving.
Negative equity doesn’t cause loan defaults but is a necessary condition for loan defaults. And there are two forms of homeowner default – where someone is unable to pay and where someone is unwilling to pay anymore. For many people it would be better for them to walk away from their house, rent and start saving for a new one – their equity if they ever had any, is gone and they are paying a higher rent through loan repayments than they would if they rented a house. Called “strategic” default it happens when people figure it’s cheaper to rent than pay a mortgage. It’s a recognised rational phenomenon in the US and one which is also becoming a feature here. While an Irish bank may theoretically sue for the balance owing after it’s sold a house, it’s practically impossible to recover the money.
Short selling, where borrowers agree to sell their home and the bank agrees to accept the proceeds and write off the negative equity, is also quite common in the US. Talk there is of a negative equity resolution programme to force banks to write down loans to current house values. Its proponents say that “cramming down” loans in this way should leave the homeowner with some equity ownership in their home.
Here in Ireland nothing concrete has been done to make family homes more affordable or to address negative equity. Nor has there been any investigation into what went so badly wrong with the consumer mortgage market. The entire focus has been on stabilising the banks – the NAMA project. Its debt forgiveness bill for underwater land and property development loans amounting to tens of billions will be unveiled this week. Not a single scrap of official paper exists to estimate the scale of household negative equity. Not one official line has been printed on how to fix the shattered home mortgage market.
Instead there’s been a crisis response allowing for loan modifications at the discretion of the lender. A homeowner may be protected against repossession for a limited period of time, but they have no right to renegotiate or modify their loan. Banks are playing ball as they know repossessions are not on – they cost too much and would backfire in depressing the housing market even further. They also know that formally calling in loans will trigger loan losses they cannot afford. Yet loan forbearance – putting things off – worsens negative equity as costs are eventually capitalised and loans become even more unaffordable.
The Americans stopped talking about the problem long ago. They have two schemes targeting 10m at risk homeowners. One called HARP which refinances and insures loans at lower rates is aimed at reducing loan repayments. The other called HAMP is aimed at modifying loans so repayments fall to below 31% of household gross income. But take-up has been dismal as modifications are at lenders discretion. British schemes are also foundering as banks have the discretion to say no to loan modification.
Discretionary programmes fail to address the fundamental issue – without writing down some of the debt owing, people are left worse off, owing more then they started with. Talk is now switching from debt forbearance to debt reduction modifications that write down the amount owing to less than the open market value of the home leaving the homeowner with some equity with which to move on. This thinking takes into account the need for people to retain some sense of ownership, invest in maintaining their home and be able to sell and move on.
How bad is the problem here? Sparse data indicates there are about 790,000 consumer loans secured by houses, with attached borrowings of €147bn. About 640,000 households owe €118bn on their homes. And of these, if the collapse in prices drops to 50% this year, one in three will be in negative equity including 125,000 first timers. Negative equity would be €7.4bn, on average €38,000 per household. But this is an average. The true extent of negative equity is much worse for those who borrowed at high LTV’s over 30 years. A third of all loans issued in 2007 where for 100% finance. Many more were topped up with unsecured loans from credit unions and others. Over 25,000 are in serious default, 30,000 have negotiated forbearance and 20,000 are on mortgage interest subsidies. These are the loans in trouble – there are no estimates for those at risk of default. With 440,000 people unemployed and many more suffering permanent reduction in income the impact of negative equity and its capacity to undermine economic recovery is barely in understood.
A standardised regulated rules based approach to modifications should be introduced requiring all lenders to include for permanent reductions in principal to align mortgage debt to property values. These should be negotiated as early as possible even before a delinquency occurs. In addition, if mortgage debt is to be included in a personal insolvency regime then its enforcement officers should be allowed to modify the mortgage (downwards) to achieve an affordable repayment tied to property value today and not some assessment of likely future value. Consideration could also be given to from of negative equity certificate that could be used as a future claw back of the loan amount reduced.
A version of this article appeared in the Irish Examiner, Business Section, Monday 29th March 2010
Monday, March 22, 2010
Spectre of bad lending continues to haunt credit unions
Despite their "open for business" claims, credit unions are in fact struggling to make new loans, writes Bill Hobbs
The legacy of boom time lending, when few questions were asked of peoples ability to repay and bad lending practices prevailed, is haunting credit unions as much as banks. When inevitably implemented, a consumer debt forgiveness programme will impact most severely on credit unions, given their lending strategies, policy and practices.
Despite their trade bodies “open for business” publicity and claims of increasing lending, credit unions are in fact struggling to make new loans. So much so, that their financial stability is threatened unless they find a way to make more loans quickly and safely. The news is not good; 10% of credit union loans are in arrears of more than ten weeks, new lending has collapsed and balance sheets have shrunk by an overall average of 5%.
Audited accounts of a sample of thirty leading credit unions representing €2.7bn, one fifth of the movements’ total assets and €1.4bn of the €6.2bn consumer loan book, show a dramatic decline in new loan issues. On average they lent 27% less in 2009 over 2008 with some of the largest dropping by over 45%. One major community credit union reported a drop of 67% with a leading employer based credit union reporting a 59% decline. All bar one credit union reported significant reductions in loan repayments, indicative of increasing loan defaults. Tellingly while new loan issues dropped by over a quarter, the overall loan book declined by only 4%, evidencing that the credit unions are engaging in wholesale loan modification, mainly rescheduling bad loans over longer time periods.
The hollowing out of the loan book where bad loans are rescheduled means two things. The first is bad debt provisions increase and secondly credit risk is amplified as longer term loans are inherently riskier. More so where the have been made due to problems with borrowers breaching their original loan contracts.
Ever since 2000, the underperformance of credit union lending and poor credit risk practices has threatened to undermine their financial stability. By 2005, despite boom time economic conditions when people were far better off, credit unions reported loan arrears over three times the level that would have been expected. Bad debts were not being written off and provisions were being manipulated to maintain high dividend pay out rates to savers. Last year credit unions reported that almost 10% of their loans were in arrears of more than ten weeks – a critical loan default risk threshold for unsecured short term consumer loans. At least €620m is exposed to significant losses. However as credit unions use a method for calculating loan arrears which underestimates in some cases arrears by as much as 45%, the true position will not be known until arrears are more accurately reported on this year. It is highly likely the 10% figure is a significant underestimate- the true figure may climb to 15%, by the end of this year, where upwards of €1bn may be at risk.
The Irish credit union business model which relies on rewarding savers with dividends derived from profits made from making loans is foundering as new lending dramatically declines.
The problem for Irish credit unions is this; in any one year they have to re-lend 50% of their loan book to stand still. Lend less and their loan book shrinks. Entirely reliant on loan interest and investment income, any decline in lending will severely impact on income and ability to finance operating expenses, pay a dividend and provide for reserves. Unlike their peers elsewhere, as Irish credit unions have not developed other sources of income, they are overly exposed to lending risks. This risk is amplified by their low ratio of lending to total assets where less than 50% of money is out on loans. So much so that interest on loans barely covers operating costs.
In any one year credit unions issue about 900,000 loans totalling €3.1bn. About half of these range between €5000 and €25,000 range. Total loans in this category are just over €3bn. As only 20% of loans are backed by savings as collateral, fully €5bn is unsecured short to medium term consumer lending much of which has a sub-prime pathology – where people used credit unions loans as secondary or last resort sources of personal finance. Many borrowers, including first time house buyers, who used credit unions loans to fund their down payments, are experiencing significant problems.
Tellingly all but one of the thirty credit unions analysed showed a dramatic decline in loan issues. But this did not translate into a drop in overall loans. This is clear evidence of the amount of loan modifications, mainly loan rescheduling, as bad loans are stretched out over longer terms. Analogous to pouring more sand on a land mine – loan modifications may hide the problem but it doesn’t make it any less explosive. Buying time in the vain hope that borrowers will make good unsecured loan repayments flies in the face of an unpalatable certainty - billions in unsecured consumer loans will have to be written off by Irish banks and credit unions.
International experience indicates that troubled unsecured consumer lending results in debt write offs of upwards of 75% with median experience of 50%. There are no indications that loan loss experience in Ireland will be any better.
Credit unions remain a significant source of consumer loans and could increase new loans by at least 50%. The problem is not one of lack of flexibility to lend as claimed by their trade bodies but of competence to do so safely. As with all problems, resolution begins with admitting to the problem itself.
Faced with significant challenges, they must lend more in ratio to their assets, to improve financial stability. They have to reverse the dramatic decline in new loans. And they must do this safely within tough economic conditions. They will also have to slash operating costs which are far too high to sustain their business and find ways to increase fee income if they are to remunerate savers, fund loan losses and repair capital reserves.
A version of this article appeared in the Irish Examiner, Business Section, Monday 22nd March 2010
A version of this article appeared in the Irish Examiner, Business Section, Monday 22nd March 2010
Monday, March 15, 2010
A co-operative gives credit where credit is due
Credit unions may be an alternative to commercial banks, writes Bill Hobbs
Is the Government serious about creating a “peoples bank”- a co-operative banking alternative for ordinary people and small businesses? Intuitively it makes sense. As banking co-operatives are owned by their customers, they focus not on maximising shareholder value but on maximising customer value. Interestingly the component parts of a co-operative banking system already exist. An alliance between mutual building societies and credit unions through a federated network would create a national co-operative banking system – one governed and owned by millions of ordinary citizens.
Irish credit unions and mutual building societies share common, historical roots in European credit co-operative movements that first appeared in the 19th Century when, during a time of industrial development and social disruption, small groups of people banded together to pool their savings and grant loans to one another.
Initially credit co-operative’s primary economic and social purpose was to provide credit to people who were financially excluded – unbanked because commercial banks were not interested in serving them. They spread throughout Europe, crossed the Atlantic to Canada, and in turn were adapted in the U.S. in the form of credit unions. It was the U.S. credit union credit co-operative model that was eventually established in Ireland in the 1950’s. Today, credit unions and credit co-operatives have evolved into co-operative banks providing affordable financial services to hundreds of millions of ordinary people worldwide. In all cases, they provide a full range of consumer and small business financial products.
Banking co-operatives evolve in three phases having differing business models and central collective systems. In their establishment phase, co-ops use a “finance company” model; members buy shares with their savings, which are treated as risk capital remunerated by dividends paid from profits made from making loans. New co-operatives proliferate as communities and employees set up their own ones. They form trade associations, such as Leagues, to represent to Government and arrange for central group purchases. The overriding emphasis is on preserving the independent autonomy of the individual co-op. Termed an “atomised” system there is little if any strategic co-operation between individual co-operatives. Products and services remain basic. Collectively while appearing to be financially strong, they are in fact were no stronger than the weakest of their members. Such is the Irish credit union system today, where for nearly two decades, credit unions have been stuck in evolving to second phase “savings and loan” co-operatives.
As “Savings and Loan” co-operatives, credit unions compete at market rates, treat shares as deposits paying regular interest, expand their range of loans and savings products and augment them with fee earning products. Individual co-operatives cede autonomy in return for greater safety and better products and services. In shifting from the atomised system to a federated network, they establish central finance facilities that provide treasury, liquidity, capital, IT, money transmission business loans, mortgages and other products and services they would otherwise be unable to provide on their own. Such federated networks see their member co-operatives cross guaranteeing each other to underpin their financial stability and strength. Central finance companies, many operating as wholesale banks, are at the heart of credit union systems in the US, Canada, Australia and Poland and European co-operative banks such as RaboBank. During this phase co-operatives begin to rationalise as smaller non-viable operations merge with larger ones.
Finally, savings and loans co-operatives transition to full service co-operative banks offering a broad range of products and services to their personal and business customers.
The key characteristic of all successful credit union/co-operative banking systems is the existence of strong centralised support mechanisms. Development of federated networks were essential to achieving the scale economies and professional governance and management systems required for credit co-ops to exploit the savings and loans model and develop the competence to compete as full service financial institutions.
The “finance company” model still in use here by credit unions contains a number of inherent flaws exposed under recent stressful conditions. Many are struggling to generate sufficient profits to reward their members, build the capital buffers necessary to ensure financial stability and invest in business sustainability. Under lent with non-diversified products and little capacity to manage margin and costs, achieve scale efficiencies or generate fee income, the future is bleak. Unless that is credit unions make a step change, shift to the savings and loans model and establish the supporting centralist structures required to do so.
It is a matter of historic record that while credit unions have long recognised the need to develop a cohesive centralist system, they have been unable for a variety of reasons to transition and mature as credit co-operatives in line with their international peers. Transitioning to a savings and loans model within a federated network is an urgent requirement if the sector is to deliver on its latent potential to offer a viable consumer and small business banking alternative to commercial banking. Credit unions will not be able to accomplish this change on their own.
If Government considers the co-operative banking sector of national importance, then policy must address one key question: is the future to be defined by an outdated autonomous atomised credit union system or defined by a federated network in which credit unions and building societies are constituent owners? Deciding on the latter is the first step to begin to build a viable co-operative banking system that works.
There is an opportunity to craft a people’s co-operative banking system through a federated network alliance between credit unions and mutual building societies. Such a network would; have over 2m members, a national foot print of over 450 outlets, combined assets over €35bn, offer a multi-channel consumer and in time small business, full banking service. There are many who might find such a concept implausible. But the country needs a safe and working banking system – one that commercial banking cannot deliver on for some time – credit unions and building societies have the basis to craft a co-operative banking system and Government has the ability to make it happen.
A version of this article appeared in the Irish Examiner, Business Section, Monday 15th March 2010
Is the Government serious about creating a “peoples bank”- a co-operative banking alternative for ordinary people and small businesses? Intuitively it makes sense. As banking co-operatives are owned by their customers, they focus not on maximising shareholder value but on maximising customer value. Interestingly the component parts of a co-operative banking system already exist. An alliance between mutual building societies and credit unions through a federated network would create a national co-operative banking system – one governed and owned by millions of ordinary citizens.
Irish credit unions and mutual building societies share common, historical roots in European credit co-operative movements that first appeared in the 19th Century when, during a time of industrial development and social disruption, small groups of people banded together to pool their savings and grant loans to one another.
Initially credit co-operative’s primary economic and social purpose was to provide credit to people who were financially excluded – unbanked because commercial banks were not interested in serving them. They spread throughout Europe, crossed the Atlantic to Canada, and in turn were adapted in the U.S. in the form of credit unions. It was the U.S. credit union credit co-operative model that was eventually established in Ireland in the 1950’s. Today, credit unions and credit co-operatives have evolved into co-operative banks providing affordable financial services to hundreds of millions of ordinary people worldwide. In all cases, they provide a full range of consumer and small business financial products.
Banking co-operatives evolve in three phases having differing business models and central collective systems. In their establishment phase, co-ops use a “finance company” model; members buy shares with their savings, which are treated as risk capital remunerated by dividends paid from profits made from making loans. New co-operatives proliferate as communities and employees set up their own ones. They form trade associations, such as Leagues, to represent to Government and arrange for central group purchases. The overriding emphasis is on preserving the independent autonomy of the individual co-op. Termed an “atomised” system there is little if any strategic co-operation between individual co-operatives. Products and services remain basic. Collectively while appearing to be financially strong, they are in fact were no stronger than the weakest of their members. Such is the Irish credit union system today, where for nearly two decades, credit unions have been stuck in evolving to second phase “savings and loan” co-operatives.
As “Savings and Loan” co-operatives, credit unions compete at market rates, treat shares as deposits paying regular interest, expand their range of loans and savings products and augment them with fee earning products. Individual co-operatives cede autonomy in return for greater safety and better products and services. In shifting from the atomised system to a federated network, they establish central finance facilities that provide treasury, liquidity, capital, IT, money transmission business loans, mortgages and other products and services they would otherwise be unable to provide on their own. Such federated networks see their member co-operatives cross guaranteeing each other to underpin their financial stability and strength. Central finance companies, many operating as wholesale banks, are at the heart of credit union systems in the US, Canada, Australia and Poland and European co-operative banks such as RaboBank. During this phase co-operatives begin to rationalise as smaller non-viable operations merge with larger ones.
Finally, savings and loans co-operatives transition to full service co-operative banks offering a broad range of products and services to their personal and business customers.
The key characteristic of all successful credit union/co-operative banking systems is the existence of strong centralised support mechanisms. Development of federated networks were essential to achieving the scale economies and professional governance and management systems required for credit co-ops to exploit the savings and loans model and develop the competence to compete as full service financial institutions.
The “finance company” model still in use here by credit unions contains a number of inherent flaws exposed under recent stressful conditions. Many are struggling to generate sufficient profits to reward their members, build the capital buffers necessary to ensure financial stability and invest in business sustainability. Under lent with non-diversified products and little capacity to manage margin and costs, achieve scale efficiencies or generate fee income, the future is bleak. Unless that is credit unions make a step change, shift to the savings and loans model and establish the supporting centralist structures required to do so.
It is a matter of historic record that while credit unions have long recognised the need to develop a cohesive centralist system, they have been unable for a variety of reasons to transition and mature as credit co-operatives in line with their international peers. Transitioning to a savings and loans model within a federated network is an urgent requirement if the sector is to deliver on its latent potential to offer a viable consumer and small business banking alternative to commercial banking. Credit unions will not be able to accomplish this change on their own.
If Government considers the co-operative banking sector of national importance, then policy must address one key question: is the future to be defined by an outdated autonomous atomised credit union system or defined by a federated network in which credit unions and building societies are constituent owners? Deciding on the latter is the first step to begin to build a viable co-operative banking system that works.
There is an opportunity to craft a people’s co-operative banking system through a federated network alliance between credit unions and mutual building societies. Such a network would; have over 2m members, a national foot print of over 450 outlets, combined assets over €35bn, offer a multi-channel consumer and in time small business, full banking service. There are many who might find such a concept implausible. But the country needs a safe and working banking system – one that commercial banking cannot deliver on for some time – credit unions and building societies have the basis to craft a co-operative banking system and Government has the ability to make it happen.
A version of this article appeared in the Irish Examiner, Business Section, Monday 15th March 2010
Tuesday, March 9, 2010
Draft Code of Conduct for Debt Managers - Protecting Consumers from harm
The above link is to SCRIBD - consider the claims made by debt managers google ads on the site !
From Bill Hobbs, analyst and commentator on consumer financial services:
Vulnerable consumers must be protected from harmful debt manager practices such as
False and misleading claims
Misleading advertising
Deceptive online marketing
Ambiguous or hidden fees
Predatory selling
• Government must regulate commercial debt managers
• Attached is a draft Consumer Protection Code for Commercial Debt Managers submitted to the Government’s expert group on consumer debt, to kick start open discussion on protecting consumers.
Commenting today Bill Hobbs said
End.
Text of letter sent to the Minister for Finance and Minister of Communications, Energy and Natutral Resourses
Preventing Consumer Harm - Regulating Commercial Debt Managers
Dear Minister,
In an unregulated market, competition almost inevitably leads to unscrupulous behaviour, sharp practice, predatory selling and abusive marketing. Unregulated, the debt management sector poses a particularly acute risk of harming vulnerable, indebted consumers. My letter addresses this risk and proposes a consumer protection code that could be put in place within a short time.
While commercial debt managers are new phenomena in Ireland, they are not in the UK, where harmful practices first documented there are now appearing here:
• False and misleading claims
• Misleading advertising in newspapers and on websites
• Misleading promotional materials
• Website opacity and deceptive online marketing
• Ambiguous or hidden pricing and fee models
• Predatory selling
• Marketing of “free advice”
MABS recently expressed concern over debt managers using its good name to market their services.
In the UK, the OFT considers debt managers to be in their high risk consumer protection category. Their experience has been one of consistent difficulty in controlling for consumer harm as the sector remains unregulated. Tackling problems is a high priority “there is a significant risk that consumers who suffer from distressed debt could end up in a worse, rather than better, financial position.”(OFT) Concerned over worsening non-compliance it is engaged in a review of the sector. Responding to growing consumer protection concerns the UK government is considering regulating the sector. Leading consumer advocates and lenders maintain self-regulation hasn’t worked.
“Our evidence shows that there is a need for statutory regulation of debt management schemes. Self regulation hasn’t yet proved to be sufficient," UK Citizens Advice
“Without regulation debt management companies are free to act in ways that are clearly harmful to the consumer and so I urge the government to ensure this consultation yields concrete results before the situation gets completely out of hand." Moneysupermarket.com
Worryingly the commercial debt management sector here is at the same start up stage as in the UK in the late 90’s but with the additional problem of escalating consumer indebtedness.
Faced with the same issues what’s the solution ?
Bringing debt managers in under the Consumer Credit Act will allow for licensing and authorisation procedures. As legislation takes time, there is an interim option worthy of consideration.
• The NCA, unlike the OFT, does not have debt manager licensing powers, but it can as a matter of consumer protection issue guidelines. It can also co-operate with the Financial Regulator. It’s eminently possible for both bodies to co-operate in publishing and supervising a code of conduct to protect vulnerable consumers from harm.
• The LRC proposals on personal insolvency made a number of recommendations relating to debt managers. It’s generally accepted that there is a need for alternative debt enforcement and resolution systems to the current court based one. Debt management plans appear to offer one component of an alternative system. MABS is working with debt management protocols that will need to be established on a firmer footing.
Taking existing consumer protection codes and codes of business conduct, LRC proposals and UK experience into account I have assembled a “strawman” consumer protection code for commercial debt managers. It is attached with this letter. I have also written to the Chairman of the expert group on consumer indebtedness.
I would welcome the opportunity to discuss its contents as it contains a number of enhancements designed to ensure consumer protection.
Yours sincerely
Bill Hobbs
9th March 2010
Press Release 9th March 2010
Preventing Consumer Harm - Regulating Commercial Debt Managers
From Bill Hobbs, analyst and commentator on consumer financial services:
Vulnerable consumers must be protected from harmful debt manager practices such as
False and misleading claims
Misleading advertising
Deceptive online marketing
Ambiguous or hidden fees
Predatory selling
• Government must regulate commercial debt managers
• Attached is a draft Consumer Protection Code for Commercial Debt Managers submitted to the Government’s expert group on consumer debt, to kick start open discussion on protecting consumers.
Commenting today Bill Hobbs said
“Unless a regulated code of conduct is introduced rapidly into the Irish market to control and supervise the activities of the fast-growing debt management sector, which is currently unregulated, we will be faced with further disaster as distressed borrowers are inevitably exposed to predatory activity by unscrupulous debt management operations that, will tarnish what could otherwise be a notable and timely addition to the financial services mix.
Ireland has had a very poor record in closing regulatory loopholes such as with sub-prime mortgages, only acting long after the horse had bolted. It’s not too late to ensure that this time it will be different.”
“With growing evidence of very substantial number of ordinary people who are in arrears on personal and mortgage debt and experiencing Dickensian era debt enforcement and insolvency laws, there is an urgent requirement for Government action. The establishment of an advisory group is a help in dealing with a wider agenda including changes to insolvency law but Government can move today to bring debt management companies in under the regulatory framework through IFSRA and the NCA. In order to kick start open discussion, I have assembled a starting point – a Guidance and Code of Conduct for Debt Management Companies ideally to become statute-enforced.”
End.
Text of letter sent to the Minister for Finance and Minister of Communications, Energy and Natutral Resourses
Preventing Consumer Harm - Regulating Commercial Debt Managers
Dear Minister,
In an unregulated market, competition almost inevitably leads to unscrupulous behaviour, sharp practice, predatory selling and abusive marketing. Unregulated, the debt management sector poses a particularly acute risk of harming vulnerable, indebted consumers. My letter addresses this risk and proposes a consumer protection code that could be put in place within a short time.
While commercial debt managers are new phenomena in Ireland, they are not in the UK, where harmful practices first documented there are now appearing here:
• False and misleading claims
• Misleading advertising in newspapers and on websites
• Misleading promotional materials
• Website opacity and deceptive online marketing
• Ambiguous or hidden pricing and fee models
• Predatory selling
• Marketing of “free advice”
MABS recently expressed concern over debt managers using its good name to market their services.
In the UK, the OFT considers debt managers to be in their high risk consumer protection category. Their experience has been one of consistent difficulty in controlling for consumer harm as the sector remains unregulated. Tackling problems is a high priority “there is a significant risk that consumers who suffer from distressed debt could end up in a worse, rather than better, financial position.”(OFT) Concerned over worsening non-compliance it is engaged in a review of the sector. Responding to growing consumer protection concerns the UK government is considering regulating the sector. Leading consumer advocates and lenders maintain self-regulation hasn’t worked.
“Our evidence shows that there is a need for statutory regulation of debt management schemes. Self regulation hasn’t yet proved to be sufficient," UK Citizens Advice
“Without regulation debt management companies are free to act in ways that are clearly harmful to the consumer and so I urge the government to ensure this consultation yields concrete results before the situation gets completely out of hand." Moneysupermarket.com
Worryingly the commercial debt management sector here is at the same start up stage as in the UK in the late 90’s but with the additional problem of escalating consumer indebtedness.
Faced with the same issues what’s the solution ?
Bringing debt managers in under the Consumer Credit Act will allow for licensing and authorisation procedures. As legislation takes time, there is an interim option worthy of consideration.
• The NCA, unlike the OFT, does not have debt manager licensing powers, but it can as a matter of consumer protection issue guidelines. It can also co-operate with the Financial Regulator. It’s eminently possible for both bodies to co-operate in publishing and supervising a code of conduct to protect vulnerable consumers from harm.
• The LRC proposals on personal insolvency made a number of recommendations relating to debt managers. It’s generally accepted that there is a need for alternative debt enforcement and resolution systems to the current court based one. Debt management plans appear to offer one component of an alternative system. MABS is working with debt management protocols that will need to be established on a firmer footing.
Taking existing consumer protection codes and codes of business conduct, LRC proposals and UK experience into account I have assembled a “strawman” consumer protection code for commercial debt managers. It is attached with this letter. I have also written to the Chairman of the expert group on consumer indebtedness.
I would welcome the opportunity to discuss its contents as it contains a number of enhancements designed to ensure consumer protection.
Yours sincerely
Bill Hobbs
9th March 2010
Understanding causes of consumer debt crisis is key to solving it
Group set up to fix the credit crisis excludes many experts, writes Bill Hobbs
Almost two years on the Government has finally officially recognised the consumer credit crisis exists. But its announcement of the setting up of an expert group to look at solutions for consumer indebtedness was given a jaundiced welcome not only for what the group would be doing but for the absence of balanced expert participation and representation of the ordinary person. People experiencing the stress of unaffordable indebtedness can take little comfort from the announcement.
The expert group chaired by a corporate insolvency expert, comprises representation from the IBF, Financial Regulator, Free Legal Aid Centres, the Law Reform Commission, two accountants, a retired bank CEO and ssenior officials of the Departments of Finance, Taoiseach, Justice, Equality and Law Reform, Social & Family Affairs and Environment, Heritage & Local Government.
The expert group is remarkable for who hasn’t been included. MABS with almost two decades of experience in debt management during which it recently piloted a scheme with the IBF has been excluded. So too has the National Consumer Agency which is being merged with the Competition Authority, and is taking responsibility for part of the financial services consumer protection mandate. Informed observers hope FLAC and the LRC participants will balance indebted consumer’s expectations against what appears to be a bias towards the creditors or bankers interest.
On record in recommending first time buyers to use interest only mortgages and risk over borrowing in buying as big a home as possible, one of expert groups non-government members, commenting recently on mortgage unaffordable indebtedness wrote “Calling it the family home in some way confers a sacredness on it. We should not be doing this. If people lived a very high lifestyle and are now over borrowed, then they have to pay the price”.
Are similar views widely shared? Some commentators have recently suggested that people will deliberately use a personal insolvency system as a financial planning tool to protect their family home. Last week an eminent economist warned of the moral hazard risks in debt forgiveness. Such thinking appears to reflect an outdated Dickensian concern that people will abuse a personal insolvency financial safety net and the tax payer will have to carry the can.
Mature democracies have long since created schemes that effectively deal with such moral hazard argument. They have provided just and fair systems that limit the economic and social costs to society. More importantly these systems provide a future to people to live a productive life free from the stress of debt.
Crafting a financial safety net for people who are hopelessly insolvent and allowing for debt forgiveness is an issue that gives rise to emotive, ill-informed, naïve and scare mongering commentary. It seems some commentators may not fully appreciate the Law Reform Commissions recent proposals in which it carefully considers international precedents and recommends a non-court based personal insolvency regime for people who are unable to pay their debts in full. Its report deals with amongst other things moral hazard, an unwillingness to pay, earned debt forgiveness and discusses the social and economic principles that underpin fair and equitable debt resolution and forgiveness systems.
But many believe that banking stabilisation and banking profitability will override any consumer indebtedness initiatives. All the more so as the Government will want to ensure solutions are subordinate to its NAMA project and principal objective of ensuring a working banking system. The reality is that the consumer debt crisis will have to be dealt with, within the context of rebuilding a working banking system. And as the banks will probably be unable to raise capital from investors, the state will have to provide additional capital to fund their consumer debt losses, structuring a consumer debt resolution scheme will not be easy.
Owing more than €185bn in personal debt of which €147bn is in mortgage finance Irish consumers are the most indebted in Europe. Without counting personally guaranteed small business debts. Over 250,000 households are probably by now in negative equity, 440,000 are unemployed and many more are on short time or have suffered income reduction. Along with increased taxation people are now facing higher interest rates caused by deflation and banks increasing their lending margins and charges. While incomes and living costs are declining, loan balances are not and the cost of financing their repayment is rising. Financially vulnerable households experiencing and anticipating problems accounted for over a third of the population last year. Tens of thousands of registered unemployed are on mortgage interest relief subsidies. No one knows how big the problem is and how much will inevitably have to be written off by the banks. If loan losses are 10% then the write offs will amount to well over €18bn.
There are two components of the consumer credit crisis. Home mortgages and other personal and personally guaranteed debts. Both require different solutions. The Law Reform Commissions proposals for a personal insolvency regime exclude mortgage debt and are based on the internationally accepted principle of debt forgiveness which is earned over time. It is also based on the principle that people pay what they can and lenders write off the rest.
Mortgage debt is complex and there are no easy solutions nor is there a one size fits all approach that will work. Solutions will have to allow for a continuum of un-affordability, from people having temporary short term repayment difficulties to those who are hopelessly insolvent. The current moratorium on legal action and other reliefs are insufficient. As many homeowners have mortgage and other debts, the overriding principle of any scheme will be to prioritise family home protection.
While consumer debt forgiveness may not be on the agenda – for now - it will be in time. You cannot expect people to pay debt they manifestly cannot afford to pay.
Whatever the expert group proposes does it should do it transparently and report on its findings particularly the scale and depth of the consumer credit crisis. To date no one has been tasked with understanding the causes of the consumer debt crisis.
A version of this article appeared in the Irish Examiner, Business Section, Monday 1st March 2010
Almost two years on the Government has finally officially recognised the consumer credit crisis exists. But its announcement of the setting up of an expert group to look at solutions for consumer indebtedness was given a jaundiced welcome not only for what the group would be doing but for the absence of balanced expert participation and representation of the ordinary person. People experiencing the stress of unaffordable indebtedness can take little comfort from the announcement.
The expert group chaired by a corporate insolvency expert, comprises representation from the IBF, Financial Regulator, Free Legal Aid Centres, the Law Reform Commission, two accountants, a retired bank CEO and ssenior officials of the Departments of Finance, Taoiseach, Justice, Equality and Law Reform, Social & Family Affairs and Environment, Heritage & Local Government.
The expert group is remarkable for who hasn’t been included. MABS with almost two decades of experience in debt management during which it recently piloted a scheme with the IBF has been excluded. So too has the National Consumer Agency which is being merged with the Competition Authority, and is taking responsibility for part of the financial services consumer protection mandate. Informed observers hope FLAC and the LRC participants will balance indebted consumer’s expectations against what appears to be a bias towards the creditors or bankers interest.
On record in recommending first time buyers to use interest only mortgages and risk over borrowing in buying as big a home as possible, one of expert groups non-government members, commenting recently on mortgage unaffordable indebtedness wrote “Calling it the family home in some way confers a sacredness on it. We should not be doing this. If people lived a very high lifestyle and are now over borrowed, then they have to pay the price”.
Are similar views widely shared? Some commentators have recently suggested that people will deliberately use a personal insolvency system as a financial planning tool to protect their family home. Last week an eminent economist warned of the moral hazard risks in debt forgiveness. Such thinking appears to reflect an outdated Dickensian concern that people will abuse a personal insolvency financial safety net and the tax payer will have to carry the can.
Mature democracies have long since created schemes that effectively deal with such moral hazard argument. They have provided just and fair systems that limit the economic and social costs to society. More importantly these systems provide a future to people to live a productive life free from the stress of debt.
Crafting a financial safety net for people who are hopelessly insolvent and allowing for debt forgiveness is an issue that gives rise to emotive, ill-informed, naïve and scare mongering commentary. It seems some commentators may not fully appreciate the Law Reform Commissions recent proposals in which it carefully considers international precedents and recommends a non-court based personal insolvency regime for people who are unable to pay their debts in full. Its report deals with amongst other things moral hazard, an unwillingness to pay, earned debt forgiveness and discusses the social and economic principles that underpin fair and equitable debt resolution and forgiveness systems.
But many believe that banking stabilisation and banking profitability will override any consumer indebtedness initiatives. All the more so as the Government will want to ensure solutions are subordinate to its NAMA project and principal objective of ensuring a working banking system. The reality is that the consumer debt crisis will have to be dealt with, within the context of rebuilding a working banking system. And as the banks will probably be unable to raise capital from investors, the state will have to provide additional capital to fund their consumer debt losses, structuring a consumer debt resolution scheme will not be easy.
Owing more than €185bn in personal debt of which €147bn is in mortgage finance Irish consumers are the most indebted in Europe. Without counting personally guaranteed small business debts. Over 250,000 households are probably by now in negative equity, 440,000 are unemployed and many more are on short time or have suffered income reduction. Along with increased taxation people are now facing higher interest rates caused by deflation and banks increasing their lending margins and charges. While incomes and living costs are declining, loan balances are not and the cost of financing their repayment is rising. Financially vulnerable households experiencing and anticipating problems accounted for over a third of the population last year. Tens of thousands of registered unemployed are on mortgage interest relief subsidies. No one knows how big the problem is and how much will inevitably have to be written off by the banks. If loan losses are 10% then the write offs will amount to well over €18bn.
There are two components of the consumer credit crisis. Home mortgages and other personal and personally guaranteed debts. Both require different solutions. The Law Reform Commissions proposals for a personal insolvency regime exclude mortgage debt and are based on the internationally accepted principle of debt forgiveness which is earned over time. It is also based on the principle that people pay what they can and lenders write off the rest.
Mortgage debt is complex and there are no easy solutions nor is there a one size fits all approach that will work. Solutions will have to allow for a continuum of un-affordability, from people having temporary short term repayment difficulties to those who are hopelessly insolvent. The current moratorium on legal action and other reliefs are insufficient. As many homeowners have mortgage and other debts, the overriding principle of any scheme will be to prioritise family home protection.
While consumer debt forgiveness may not be on the agenda – for now - it will be in time. You cannot expect people to pay debt they manifestly cannot afford to pay.
Whatever the expert group proposes does it should do it transparently and report on its findings particularly the scale and depth of the consumer credit crisis. To date no one has been tasked with understanding the causes of the consumer debt crisis.
A version of this article appeared in the Irish Examiner, Business Section, Monday 1st March 2010
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