Are Irish credit unions safe? 42% of people participating in an online newspaper poll didn’t think so. The credit union system is suffering from a progressive illness that may become terminal for many credit unions. As a concerned member and customer, you have no way of knowing how ill your credit union is and whether or not it will survive the consumer debt crisis. Most directors do not know either, as they lack the business acumen to fully appreciate the risks to the business they are responsible for governing.
The credit union system is a part of the banking crisis. The scale is different but the outcome is the same. Having funded the consumer credit bubble, many are now facing unsustainable loan losses. This is why the regulator is demanding your credit union stress tests its loans using a base line estimate of 17% loan losses and downside estimate 25% over the next two years. Translated these would amount to system wide losses of between €1.2bn and €1.7bn. Such loan losses are not out of line with international historical experience of unsecured consumer lending during credit crisis.
Just as the banks denied the scale of their loan losses, credit unions are equally in denial and are lobbying hard to reverse the crisis prevention measures the new financial regulator and his experienced credit union regulator want to implement.
Despite prudent moves by Finance Minister Brian Lenihan to bolster safety standards, credit unions are up in arms. The minister is to allow them to modify troubled loans by rescheduling them over a longer term. Credit union trade bodies initially accepted the conditions attached, which would see the regulator issuing mandatory safety rules. The rules would require your credit union to set aside money to fund loan losses, maintain a higher level of cash safety, preserve its capital buffer and exercise care when assessing customer loan repayment affordability.
But having agreed to the conditions, credit union trade bodies and local activists have been lobbying local politicians to reverse the Minister’s proposed changes to credit union laws, contained in the Central Bank Bill 2010. They are not only disagreeing to the conditions but do not want their regulator being given powers to issue binding codes and rules. Yet credit union regulators everywhere else have been able to issue binding rules for decades. It’s fundamental to ensuring safety and soundness.
Objecting to the regulators’ new powers is nothing more than an argument for light touch credit union regulation, which does not bear scrutiny when compared to their regulation in other countries. The fact is your credit union is far less regulated than its peers internationally. It’s something credit union trade bodies would prefer local boards of directors, you and your local TD didn’t hear of.
The issue starkly highlights a dangerous fault line unique to the Irish credit union system which has a history of quite serious non-compliance with existing laws. Everywhere else credit unions are required to maintain minimum capital reserves, set aside money for bad loans and have enough cash to fund new loans, customer withdrawals and pay their creditors. In all cases these safety requirements are set by government regulators who issue mandatory binding guidelines, set rules and supervise them. What’s more, they also have powers and the resources to take prompt action to step in at an early stage to rescue troubled but viable credit unions, frequently forcing them to merge with others.
Without the capacity to do this, financial stability cannot be assured and savers funds cannot be properly protected. But credit union laws here do not provide the Regulator with the powers to regulate effectively and prevent financial crisis from happening. Had the Regulator been able to act in 2003 to issue binding rules to control credit union risk taking, they would not have lost the millions in investments they should never have been allowed make in the first place.
Credit union lobbying for light touch regulation appears to have been supported by backbench TD’s. Previous Fianna Fail-led coalition administrations were unduly influenced by grass roots political activism. And it appears it may be a feature of this coalition; last week a Green Party politician indicated that the proposed regulatory powers were to be watered down to appease credit union lobbyists.
Despite two reports into the origins of the banking crisis, it seems some politicians do not quite understand the lessons. Ineffective regulation and supervision of credit institutions was one of the principal causes of the crisis. The regulator was “captured” by the regulated and undoubtedly influenced by political lobbying.
The history of credit union regulation here has been fraught with political captivity of trade body self-interest, which led to one of the weakest, most ineffective of financial safety net systems. Until September 2008 the Irish League of Credit Unions was lobbying against a state backed deposit guarantee for your savings. It took a banking crisis before this Government finally acted to extend the guarantee to you.
Before politicians react to lobbying pressure, they should consider one question. Which is more important, the survival of a sustainable credit union system or the support of a terminally ill system?
Rather than siding with trade body self-interest and ill-informed activism of a small handful of people who would threaten their vote, politicians should consider the silent majority of ordinary people who expect that the state ensures credit unions are governed and managed safely and will be around for years to come.
While regulatory medicine may well hasten the demise of lot of terminally ill patients, what’s really needed is urgent action to put in place a robust, reliable crisis management process through which a new co-operative structure and modernised credit union system can emerge. Credit unions do not have to be saved from the regulator; they have to be saved from themselves.
A version of this article appeared in the Irish Examiner, Business Section, Friday 11th June 2010
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