Slimmed down credit unions should grasp reform opportunities

After delaying consolidation for years, credit unions are about to have it foisted on them.

Central Bank officials are making ready to apply regulatory triage by taking dozens of non-viable credit unions into care. Using its extensive resolution powers, the bank can appoint special managers to take over the running of credit unions, remove their boards and managers, order the takeover of one by another and where required, temporarily fund balance sheet rehabilitation costs.

While there’s mention of numbers shrinking from 409 to about one hundred, fewer than fifty are likely to be viable operations at this time. These numbers are the outcome of boom-time complacent sectoral leadership and poor governance when credit union balance sheets were increasingly exposed to risks. Concerned only to maximise saver’s dividends, their boards of directors and managers did not invest in building sustainable businesses and balance sheets capable of withstanding the economic recession.

 

Consequently, to prevent them pouring petrol on fires they built in their own backyards, close to three hundred credit unions have had their lending capacity restricted by the Central Bank. 

Last week, in what was probably an orchestrated campaign, trade body representatives and local politicians publically criticised the Central Bank, claiming it was driving people into the arms of moneylenders. They got their response in Taoiseach Enda Kenny’s robust defence of the Central Bank’s interventions to protect savers funds. Its interventions, which also include insisting credit unions account properly for asset values and come clean on losses, are driving the need to stabilise the network by consolidating it down to a viable and sustainable size.

Consolidation is an inevitable outcome of credit union maturity. In the U.S., Canada and Australia while numbers of credit unions have been declining for years, customer numbers and branches have grown. In these countries, induced by crisis events far less serious than here, consolidation was driven by governments and their regulatory agencies. And credit union leaders responded positively. Consolidation allowed them to realise scale economies to invest in modern technologies and establish the centralised shared services required to offer a full range of high quality financial services. The same is true of co-operative banking consolidation in mainland Europe.

Today we are seeing similar crisis induced, regulatory leadership by the Central Bank’s experienced credit union regulator the Registry of Credit Unions. It has acted to control investment and lending risks and while insisting on proper reserves, has permitted loan modifications and established a robust resolution system to enable the sector to survive and prosper. It has done so in the face of objections by credit union representative bodies who blame external forces and regulatory intervention for causing financial instability problems. The reality is that the root cause stems from credit union board rooms. An aging generation of long serving directors and their managers focused solely on maximising savers dividends and ignored the sustainability of the credit union itself.     

Crisis induced, regulatory imposed consolidation won’t work unless it’s framed within a broader strategic context. At a recent conference for managers and auditors, Professor Ray Kinsella spoke of the need to “bail in” credit unions as distinct to “bailing out” banks. At this conference, I illustrated one possible “bail in” approach when I presented on my paper “A Co-operative Banking Strategy for Ireland” recently submitted to the Commission on Credit Unions. It’s available on my blog, billhobbsie.blogspot.com.

Credit unions are economically important as they mobilise household savings as loans and socially important as they help create community social capital. Guided by a philosophy, which is best seen in their consumer advocacy values, the fundamental business purpose is to provide high quality financial services at fair prices to anyone who wants them. By excelling at this purpose they build the capital reserves needed for business sustainability, and realise their wider societal objectives. They are a vital store of intergenerational, monetary capital and facilitator of community social capital.  

As yet, credit union leadership has not come up with a “bail-in” strategy that makes sense. With the Government and Central Bank intent on stabilising the sector, credit unions need to stop looking at this as a threat and realise the opportunity it proposes.  

       

A version of this article appeared in the Irish Examiner, Business Section, Monday 19th September 2011