Credit union restriction was warranted

Had credit unions been regulated, governed and managed to standards found elsewhere they would not need to be bailed out by the state. Recent criticism of the Central Bank’s intervention to stabilise credit unions is both unfounded and unwarranted.

About one hundred credit unions - one in every four- are no longer fully functioning credit institution as they are unable to pay dividends. Along with two hundred others they have had their lending restricted by their regulator.

When credit unions can no longer function they are either closed down or their business is transferred to viable operations.  And as it costs money to do this, if credit unions don’t have it, the state typically funds the costs.

For some reason the Irish League of Credit Unions (ILCU), a trade body considered by many partly responsible for the distressed financial fragility of so many credit unions, maintains that no credit unions at present are in financial difficulty or trouble. 

About this time last year I wrote that state support of about €650m would be needed. Last week Minister Michael Noonan confirmed this analysis when he referred to a taxpayer bail-out fund of between €500m and €1bn. Taking to the airwaves, ILCU said there are “no credit unions at present who are in financial difficulty” and the bailout is a restructuring fund.

Maybe it’s concerned that despite a guarantee of €100,000 should savers lose confidence in their credit union they may move their money elsewhere en-mass and cause local runs. But this hardly squares with accusing the Central Bank of driving people to moneylenders as it only serves to undermine public confidence in their credit union.

It could have been different had regulatory attempts to reign in risk taking not been emasculated by civil servant indifference and trade body political lobbying.

Since established in 2003, the registrar of credit unions has struggled with limited powers to reign in risk taking. Between 2005 and 2007, concerns raised by the regulator and others to then finance minister, Brian Cowen, and his senior civil servants were discounted and ignored.

The Central Bank, which considers only 46 credit unions “low risk”, is finally to be given the powers it needs to properly regulate and supervise credit unions. 

Initially, close to 90 non-viable credit unions will have their business transferred to viable operations. Using new resolution powers, the bank will manage state funding to stabilise post-merger balance sheets.  In time consolidation may see the network consolidate down to less than 100 larger, sustainable credit unions, while maintaining most of the existing branch footprint. Wisely used, state funding could restructure credit unions into a modern credit co-operative system and be repaid in time.

In recent weeks there has been a concerted campaign to portray the Central Bank’s lending restriction imposed on three out of four credit unions as a primary cause of their problems.

Local politicians have accused Mathew Elderfield of driving people into the arms of loan sharks.  Perhaps they should consider why lending has been restricted.  It is important to distinguish between a credit union and the people who govern and manage them.

If all credit unions face the same challenges what are the other one- in- four doing that they haven’t been restricted?  Addressing this, in a recent speech, the credit union regulator said “it might be convenient to put stresses now evident in many credit unions down to difficult macro-economic environment we are now experiencing and there is much truth in that. However, this is only partly the reason.

For those increasing number of credit unions who now find themselves in financial difficulty there is a recurring trend – they have been poorly governed by boards and management and effective oversight by their supervisory committees has been non-existent”

Credit union activists here would have people believe they are heavily regulated. The truth is they are not regulated anything like credit unions in other advanced countries where they are subject to regulations and supervision every bit as robust as banks.

Were it not for regulatory leadership and intervention since 2008, hundreds of credit unions would have been forced to close their doors by now. Had the regulator the powers it is now getting, it could and would have prevented credit union boards and management imprudent risk taking and prevented the destruction of so much community capital.

Before local politicians criticise the Central Bank for doing its job maybe they should consider why so many credit unions are in financial trouble and why others are not.

A version of this article appeared in the Irish Examiner, Business Section, Monday 10th October, 2011