This is a news story from the future. It is of course fiction.
1st November 2020
Government finalises wind down of the Irish Credit Union Rescue Scheme
The Minister for Finance has announced the conclusion of the Irish Credit Union Rescue Scheme, almost 11 years after the credit union crisis. The cost to the taxpayer of the credit union bailout is estimated at €4bn.
At the turn of the century the Irish credit union movement was regarded as one of the most successful social movements in Irish history. From frugal beginnings it had grown to a nationwide presence of over 430 credit unions with whom over 1.5m ordinary people had savings of c€14bn. By 2009 its success was in the past as credit unions had failed to keep pace with modern Irish society. They were out of date, out of touch and showing it. Cracks had begun to appear as credit unions struggled in a complex competitive regulated environment. A crisis was brewing with the media referring to the movement as a ticking time bomb. The credit union movement ran out of time in 2009 when an explosive series of events brought it to its knees. Today people recall the Irish credit union crisis as the biggest failure in credit union history worldwide.
The crisis which resulted in the demise of credit unions began on Monday 4th February 2009 after weekend media reports that a major credit union was in serious difficulty. Coming so soon after a run on Monaghan Credit Union in 2006 and the Northern Rock crisis in 2007, savers rushed to withdraw their money. By Wednesday morning the run had started impacting neighbouring credit unions. The Irish League of Credit Unions, the ILCU, attempted to assure people their savings were safe but balked at providing support for the credit unions involved, some of whom were not its members. It operated a bailout scheme with a stabilisation fund of about €110m. As the credit unions exposed to the run had nearly €2bn in savings the ILCU board exercised its discretion and decided it could not afford to provide support.
Things then got much worse. When news spread later that Wednesday of the absence of any deposit guarantee, the run became contagious. The following morning every credit union was inundated by savers withdrawing their money. When some were told they couldn’t have their savings back because they had loans out, tempers flared and the Gardai were called to calm things down. That evening news programmes carried extensive visual coverage of ever lengthening queues all over the country. On Friday morning the Government stepped in pledging its full backing and support but it was too late. It had no support mechanisms in place to provide the cash desperately needed to stave off the run. The media ran the story that Sunday.
The following Monday morning, across the country credit union screens went blank. News then broke of two credit union IT systems crashing. Many credit unions could not transact business. Years of underinvestment in IT and poor disaster recovery had come home to roost. Customers, many who had queued for hours in driving rain, became quite agitated and Gardai were again drafted in. The situation was quickly becoming a real public crisis. Government officials learned that the IT systems would not be back up for a week, if ever. And then they heard that three other systems were close to melt down. Government and regulatory officials were faced with a nightmare scenario of a contagious run and upwards of 200 credit unions with IT systems either having failed or failing.
Throughout this time elected politicians were receiving frantic calls and e-mails from angry constituents demanding that something be done. National and local talk radio stations were overwhelmed by people calling up. Internet discussion forums took thousands of hits.
At a crisis management meeting central bank, regulatory and government officials advised that temprorary closure was the only option. The cabinet met in session that night. The following day Government ordered the closure of all credit unions. It was facing a US style Savings & Loans crisis. During the next few weeks it dawned on officials that the only option was to wind down the entire sector as the costs of rescuing credit unions were prohibitive. They set about designing a mechanism to provide the immediate repayment of all customer deposits and the orderly winding down of credit unions. They left the option open for a smaller number of larger consolidated credit unions, recognising that some might survive.
Three months later, after the Government had established ICURF, credit unions re-opened but were only permitted to handle customer withdrawals, loan repayments and collections. They were not permitted to take in savings, provide loans or any other service.
In the meantime ordinary people who had their entire life savings with credit unions couldn’t access their money. Stories of real financial hardship filled the airwaves during the three month closure. Credit unions were hit with solicitors letters demanding that savings be returned and their clients loan agreements honoured.
Local anger was directed at credit union directors and staff who could do little but wait for instructions to re-open. Entire credit union boards resigned many on legal advice to limit their personal liability. Resignations of managers and staff followed.
1st November 2020
Government finalises wind down of the Irish Credit Union Rescue Scheme
The Minister for Finance has announced the conclusion of the Irish Credit Union Rescue Scheme, almost 11 years after the credit union crisis. The cost to the taxpayer of the credit union bailout is estimated at €4bn.
At the turn of the century the Irish credit union movement was regarded as one of the most successful social movements in Irish history. From frugal beginnings it had grown to a nationwide presence of over 430 credit unions with whom over 1.5m ordinary people had savings of c€14bn. By 2009 its success was in the past as credit unions had failed to keep pace with modern Irish society. They were out of date, out of touch and showing it. Cracks had begun to appear as credit unions struggled in a complex competitive regulated environment. A crisis was brewing with the media referring to the movement as a ticking time bomb. The credit union movement ran out of time in 2009 when an explosive series of events brought it to its knees. Today people recall the Irish credit union crisis as the biggest failure in credit union history worldwide.
The crisis which resulted in the demise of credit unions began on Monday 4th February 2009 after weekend media reports that a major credit union was in serious difficulty. Coming so soon after a run on Monaghan Credit Union in 2006 and the Northern Rock crisis in 2007, savers rushed to withdraw their money. By Wednesday morning the run had started impacting neighbouring credit unions. The Irish League of Credit Unions, the ILCU, attempted to assure people their savings were safe but balked at providing support for the credit unions involved, some of whom were not its members. It operated a bailout scheme with a stabilisation fund of about €110m. As the credit unions exposed to the run had nearly €2bn in savings the ILCU board exercised its discretion and decided it could not afford to provide support.
Things then got much worse. When news spread later that Wednesday of the absence of any deposit guarantee, the run became contagious. The following morning every credit union was inundated by savers withdrawing their money. When some were told they couldn’t have their savings back because they had loans out, tempers flared and the Gardai were called to calm things down. That evening news programmes carried extensive visual coverage of ever lengthening queues all over the country. On Friday morning the Government stepped in pledging its full backing and support but it was too late. It had no support mechanisms in place to provide the cash desperately needed to stave off the run. The media ran the story that Sunday.
The following Monday morning, across the country credit union screens went blank. News then broke of two credit union IT systems crashing. Many credit unions could not transact business. Years of underinvestment in IT and poor disaster recovery had come home to roost. Customers, many who had queued for hours in driving rain, became quite agitated and Gardai were again drafted in. The situation was quickly becoming a real public crisis. Government officials learned that the IT systems would not be back up for a week, if ever. And then they heard that three other systems were close to melt down. Government and regulatory officials were faced with a nightmare scenario of a contagious run and upwards of 200 credit unions with IT systems either having failed or failing.
Throughout this time elected politicians were receiving frantic calls and e-mails from angry constituents demanding that something be done. National and local talk radio stations were overwhelmed by people calling up. Internet discussion forums took thousands of hits.
At a crisis management meeting central bank, regulatory and government officials advised that temprorary closure was the only option. The cabinet met in session that night. The following day Government ordered the closure of all credit unions. It was facing a US style Savings & Loans crisis. During the next few weeks it dawned on officials that the only option was to wind down the entire sector as the costs of rescuing credit unions were prohibitive. They set about designing a mechanism to provide the immediate repayment of all customer deposits and the orderly winding down of credit unions. They left the option open for a smaller number of larger consolidated credit unions, recognising that some might survive.
Three months later, after the Government had established ICURF, credit unions re-opened but were only permitted to handle customer withdrawals, loan repayments and collections. They were not permitted to take in savings, provide loans or any other service.
In the meantime ordinary people who had their entire life savings with credit unions couldn’t access their money. Stories of real financial hardship filled the airwaves during the three month closure. Credit unions were hit with solicitors letters demanding that savings be returned and their clients loan agreements honoured.
Local anger was directed at credit union directors and staff who could do little but wait for instructions to re-open. Entire credit union boards resigned many on legal advice to limit their personal liability. Resignations of managers and staff followed.
Over time, one by one, credit unions closed their doors, as the job of paying out deposits ended and all that was left was to collect on the loans owing. Their proud ostentatious buildings were sold off. Staff redundancies followed as credit unions were forced to cut costs to the core. It was hoped that the better governed and managed would survive but this was not to be. The reputational damage was too great.
The ensuing public hue and cry demanded to know what had gone so badly wrong. An independent public enquiry established the sheer scale of credit union problems that had given rise to the run. Years of poor governance, financial and operations management were exposed. Credit Union under investment in IT and poor disaster recovery had caused the collapse of systems at a critical time. A decade of savings growth unmatched by loans growth had destabilised credit unions business model. Credit Union assets only comprised 48% loans way off the international benchmark of 70%. Billions in excess savings were invested in high risk instruments. The global credit crunch in 2007 had esposed credit unions to large losses in their investment portfolios, wiping out many credit unions trading income and impacting their reserves.
During these hearings many directors were found to be lacking in competence and ability to govern and manage credit unions. Their excuse of being only volunteers fell of deaf ears. But ultimately the focus of scrutiny switched to Government and the Financial Regulator.
Nothing could have prepared Government for the explosion of anger when the public found out that its officials and Ministers had been aware of problems in the credit union sector and had done nothing of any consequence in response. Public anger heightened when it transpired that years of political sensitivity to credit union activists had frustrated important structural reforms and regulatory interventions that may have prevented the crisis. The enquiry's report was scathing of governmental failure to develop an appropriate financial safety net for credit unions and failing to put in place a proper system of deposit insurance. Whereas today savers know their savings are guaranteed to €500,000, in 2009 not one euro of credit union savers money was guaranteed despite 1997 legalisation requiring a deposit guarantee scheme to be in place.
The government barely survived the credit union crisis but lost the 2010 general election principally due to its role in the crisis.
Today in many Irish towns, credit union buildings have been converted to shops and offices. The signs are gone but the memories remain.
Nothing could have prepared Government for the explosion of anger when the public found out that its officials and Ministers had been aware of problems in the credit union sector and had done nothing of any consequence in response. Public anger heightened when it transpired that years of political sensitivity to credit union activists had frustrated important structural reforms and regulatory interventions that may have prevented the crisis. The enquiry's report was scathing of governmental failure to develop an appropriate financial safety net for credit unions and failing to put in place a proper system of deposit insurance. Whereas today savers know their savings are guaranteed to €500,000, in 2009 not one euro of credit union savers money was guaranteed despite 1997 legalisation requiring a deposit guarantee scheme to be in place.
The government barely survived the credit union crisis but lost the 2010 general election principally due to its role in the crisis.
Today in many Irish towns, credit union buildings have been converted to shops and offices. The signs are gone but the memories remain.
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