The publication of the interim report of the
Commission on Credit Unions is the first phase of a major effort to transform
the viability of the sector.
The credit union regulator is finally about to get the
powers it needs to properly regulate and supervise credit unions.
Recommendations contained in the credit union commission’s interim report if implemented
in full will establish the type of modern regulatory framework that ensured
credit unions elsewhere evolved as robust financial service firms.
Comprising academics, the credit union regulator, trade
association representatives and other individual expertise, the commission’s recommendations
should create an effective modern credit union regulatory system and improve
credit union governance and risk management capabilities. It is the first phase
in what will be a major transformation programme to transition credit unions to
a new operating model and network structure.
With over 200 operating under regulatory direction
restricting lending - over 100 of which are no longer fully functioning credit
institutions as they cannot pay a dividend- can credit unions ever become efficient
mobilisers of household savings using their existing business model?
The commission is silent on this key question, as it
will consider a strategy for the future of the sector in its next instalment. However,
its interim report includes financial performance data, publically made
available for the first time, confirming analysts’ predictions that significant
consolidation will be required if credit unions are to fulfil their function as
savings and loans institutions.
While the aggregate data indicates reasonable levels
of capital reserves which the commission puts down to regulatory leadership,
the outcome of Central Bank’s PCAR stress tests and Grant Thornton’s review is not
given. It’s likely the state recapitalisation requirement of €500m-€1b recently
announced by Minister Noonan is derived from these tests, as financial
performance continues to trend downwards across all sizes of credit unions.
In this instalment, the commission’s recommendations
are focussed on the immediate and urgent need to resolve non-viable credit
unions, stabilise troubled but viable ones, strengthen the regulatory
stabilisation and resolution framework and make significant improvements in credit
union governance and risk management capabilities.
While it says its report “does not impact on the independence of the
Central Bank in the performance of its statutory functions” and is “without
prejudice to the performance by the Central Bank of its statutory functions”, the authors confirm the effectiveness of the
regulatory interventions pursued to date, and support the strategy proposed by
the bank in its recent communications and seen in recent amendments to banking
resolution legislation.
Conscious of the need for urgent remedial action, it wants the Central
Bank’s new resolution powers to be applied to non-viable credit unions. These
powers include appointment of special managers, enforced mergers and
liquidation. It also wants the bank to set up and manage a stabilisation
mechanism and fund for viable credit unions and wants credit unions to pay into
the fund. It’s likely that this will be the mechanism through which up to €1bn
in state recapitalisation funding could be made available.
The report however is silent on what happens to the
controversial ILCU stabilisation scheme and current stabilisation assistance.
In what is a watershed recommendation, in keeping with
robust regulatory systems elsewhere, the commission says the bank should introduce
a prudential rule book which would set out in detail what is required of credit
unions with rules derived from its new regulation making powers.
Other recommendations include a fitness and probity
regime, risk management framework, new internal audit functions and minimum
competency requirements. These are clearly designed to improve governance and
management capacities.
As credit union trade bodies have strenuously resisted
the widening of regulatory powers and insisted that the setting of regulatory
rules be a matter for the Oireachtas and not their regulator, it remains to be
seen if they are fully supportive of these recommendations.
ILCU’s more recent denial of credit union financial
fragility and its accusations that the Central Bank is driving people into the
arms of moneylenders only serve to undermine public confidence. The Taoiseach’s
and Minister for Finance forthright rebuttal of these accusations and support
for the Central Bank along with the commission’s position mean the era of light
touch credit union regulation is over.
When implemented in full, the commission’s
recommendations will bring to an end a decade of governmental ambiguity and
indifference to the credit union sector and in particular its regulation and
supervision.
In
comparison to their international peers, Irish credit unionists were quite
reckless during the boom. For nearly a decade most they engaged in imprudent
decision making and exposed balance sheets to increasing risks. When appointed
in 2003, the credit union registrar, emasculated by inadequate legal powers,
civil servant indifference and trade body political lobbying did what he could
to reign in credit union risk taking.
While
banking regulators were asleep at the wheel, he was trying to get then Finance
Minister, Brian Cowen and his officials to wake up to systemic risks. Efforts
to reign in investment risk were frustrated by trade body lobbying against
their regulators proposed investment code.
When
they were eventually published, the registrar’s voluntary investment guidelines
came too late and credit unions lost tens of millions when their high risk
investments plummeted in value in 2008.
Similarly
in 2006, the registrars’ promotion of a deposit guarantee and stabilisation
system which would have provided the wherewithal to minimise lending risks, was
rebuffed by Cowen and his officials and he was told to talk to ILCU about
approving its self-regulatory system.
Had
Cowen supported his regulator and acted on others warnings, including mine, credit
unions may not have destroyed so much community capital.
Such is the background and context for government and
Central Bank intervention and reason why so much public money will be made
available to recapitalise them.
A public policy response in recognising the importance
of credit unions may finally provide the wherewithal to the credit union
regulator to ensure the right thing is done. It’s a pity it’s taken an economic
crisis to do so.
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