State solvency plan is in credit unions' best interests

The state has no mechanism to provide emergency solvency assistance-called stabilisation- to the credit union sector.

Yet credit unions might reject moves by the Central Bank to ensure that temporary solvency can be made available to rehabilitate insolvent but otherwise viable credit unions. And they could expose the sector to a crisis in public confidence and significant losses that will have to be borne by the taxpayer.

Next weekend, credit union representatives will be asked to endorse trade body ILCU’s rejection of the Central Bank’s proposals in favour of its own plan.

This would see it spin off its controversial Savings Protection Scheme into a stabilisation subsidiary designed to regulate and supervise credit unions and monitor and control their risk taking. There is no known example of such a non-statutory, un-regulated, credit union trade body owned and controlled scheme anywhere.

Internationally a handful of privately owned solvency support funds still exist. These are administered by incorporated bodies that are supervised under specific statutes by their state’s regulatory authorities and deposit guarantee schemes.

Do credit unionists believe that an unapproved system of self-regulation that duplicates and conflicts with the Central Bank’s statutory mandate will be agreed to by Government? Yet this is what ILCU appears set to campaign for.

Without providing a shred of supporting evidence, it maintains that only a credit union owned, governed and operated solvency support system protects the “self-help” ethos of the movement. Using the same “ethos protection” argument, it recently demanded that responsibility for credit union regulation be moved from the Central Bank to the Department of Enterprise, Trade and Employment. Yet the Central Bank’s credit union regulator has a track record in effective regulation that demonstrates its understanding and appreciation of the credit union ethos and co-operative business model.

Engendering public trust in deposit taking institutions requires a credible system of state regulation, supervision and state backed savings protection called deposit insurance. This is why stabilisation systems are part of or work hand in glove with credit union deposit guarantee schemes and their regulatory authorities in other countries. Designed to protect savers funds through rehabilitating troubled credit unions, stablisation provides temporary solvency support to fund recovery plans. But as this is more often seen as paying in good money after bad, in the vast majority of cases badly governed and managed credit unions are forced to merge with others or closed down.

Calling a statutory deposit guarantee a “death fund”, for years ILCU frustrated the development of statutory deposit protection. It wasn’t until September 2008, that Government, forced by the banking crisis, extended the states deposit guarantee scheme to cover savers funds in credit unions. Why did a credit union trade body act to deny people their statutory right to a guarantee? Why is it now acting to deny credit unions a solvency support mechanism that will ensure public confidence in credit unions? Is ILCU’s plan really about protecting the credit union ethos or enhancing its trade body interests and ambitions? Is this authentic credit union leadership?

Over time how things are done becomes more important than doing things and credit unions have stagnated. Typically a new leadership cohort emerges led by professional managers and progressive directors. Once again strong leaders, lead the transition to the next phase of development and others follow.

That this leadership did not emerge here is principally due to the institutionalised dominance of a League system which, when properly understood, is more an association for volunteer directors rather than one that represents credit unions.

It is why credit union managers have formed their own association to give voice to their views. The credit union, the repository of intergenerational community reserves, is barely represented, if at all. If it had a voice, it would demand a statutory solvency support system to protect it from bad governance and management risks.

In his most recent speech, the credit union regulator, highlighting financial instability risks, urged credit union managers to show leadership in dealing with them. In doing so he put his finger on the leadership failings of a trade body representative system firmly rooted in the past.

Good leadership recognises that to move on you need to let go of what it is you should no longer be doing. It is why credit union movements elsewhere successfully lobbied for statutory state backed savings protection systems. It’s time for credit union leadership here to let go of the past and respond to the challenges of today and tomorrow. To do this they will need a well designed, effective solvency support and resolution system, one that can only be provided by the state.

A version of this article appeared in the Irish Examiner, Business Section, Monday 13th September 2010.