Credit Union Investment Losses- More Bad News

Credit Union investments losses have once again hit the headlines with the news that one of the states largest credit unions, ESCU, which has over €210m in assets, may be forced to write off c€10m. The credit union concerned sought to downplay the loss stating was a small percentage of its total investments of €150m. But it did not state such a loss would represent c30% of its reserve base and more than three times its net retained earnings (2006)
http://www.sbpost.ie/post/pages/p/story.aspx-qqqt=MARKETS-qqqs=themarket-qqqid=28462-qqqx=1.asp

It remains to be seen how many other credit unions have been exposed to losses in the ISTC bond. http://www.thepost.ie/post/pages/p/story.aspx-qqqt=THE+INSIDER-qqqs=themarket-qqqs=computersinbusiness-qqqid=28452-qqqx=1.asp

At the same time media reports have also highlighted an Ombudsman case in which Enfield Credit Union has initially succeeded, subject to appeal, in its complaint against one of the states largest stock brokers, Davy, over the advice it claims to have received prior to purchasing perpetual bonds. The initial ruling may force Davy to buy back the bonds at par. It seems that c€273m of these bonds were bought by credit unions in pursuit of higher income flows. Some media reports have indicated potential loss exposure of at least c€47m at this time.

Earlier this year the ILCU defended perpetual bond investments indicating that 10% of its SPS fund was invested in the income earning bonds. http://archives.tcm.ie/businesspost/2007/11/18/story28286.asp

It transpired the ILCU, SPS fund was exposed to these bonds: http://www.ireland.com/newspaper/finance/2007/0507/1178204568602.html.

Yet in November 2006 , the ILCU appears to have defended such investments: http://www.tribune.ie/article.tvt?_scope=TribuneFTF&id=78396&SUBCAT=&SUBCATNAME=&DT=29/10/2006%2000:00:00&keywords=credit%20union&FC=

Such news cannot but further undermine public confidence in credit unions. It is of concern to read of losses and also of a trade body defence of what in other regulated credit union sectors would be seen as highly imprudent and innappropriate investments.

It would appear to be the case that credit unions are taking on risks their savers do not expect their savings to be exposed to. It is sheer nonsense to seek to defend such risk taking on the basis that it enhances credit union income streams. Such risk may well do so, but should never be at the expense of safety and soundness.

Accounting Body Condemned by ILCU

It seems that accountants are going public on concerns over credit unions as the latest spat hit the media headlines. http://www.independent.ie/business/irish/accountantcondemned-for-advising-members-to-bank-funds-1227242.html

This follows recent media revelations of the scale of investment losses it appears credit unions are exposed to.

Many now fear the regulators move to restrict the type of investments credit unions can engage in, has either been ignored or come to late for some as chickens come home to roost within credit union investment portfolios.

Of note also is the more recent use of robust language and blunt public messaging by regulatory officials and accountants.

Meanwhile it seems many credit union members will attend AGM's in the run up to Christmas and may well be hearing of static or reduced dividend payouts. It cannot be good news that rates may fall just as competitors deposit interest rates are rising with headline rates of 5% appearing as fresh campaigns for retail deposit funds take off.

2008 may prove to be one of the most difficult years in a long time for many credit unions as they face a signficant increase in high street competition along with the prospect of higher levels of loan default as economic activity cools rapidly. Of course many may well see an uplift in loan demand as it is likely that people will turn to credit unions as a personal lender of last resort as their easy access to credit dries up elsewhere. Which may well increase loan porfolio credit risk.

Regulatory Broadside Highlights Deficit in Irish Credit Union Safety and Soundness

In a recent speech the Irish regulator has sent a broadside into the credit union movement. The Regulator addressed issues that go to the heart of credit union safety and soundness.

In blunt robust language the Regulator has provided a catalogue of issues that need to be addressed by credit unions. Problems with lending practices, credit risk management, bad debt provisioning and investments until now reported on consistently in media, have now been officially acknowledged as posing serious concern to Ireland’s regulatory officials. The speach should be carefully read and understood by credit union boards as within it lies admonishment and implict warning that imprudent practices will no longer be tolerated. http://www.ifsra.ie/frame_main.asp?pg=%2Findustry%2Fin%5Fcru%5Fintr%2Easp&nv=%2Findustry%2Fin_nav.asp

Rather than availing of the opportunity to address the seriousness of credit union governance and operational risks once again the ILCU sought to downplay the speech by attacking the Regulator for not commenting on the debt consolidation mortgage practices of banks.

It would be better if credit union industry trade bodies and their leaders addressed the issues including the scale of credit union unsecured personal lending to first time house buyers over recent years as these loans are now highly exposed to potential losses.

Attacking regulatory officials undermines confidence in the credit union movement which is facing significant reputational damage from continuous media stories of serious problems. Such defensiveness only serves to heighten public awareness and concern over the safety and soundness of Irish credit unions.

Irish Regulator targets lending practices and compliance culture

The news that the Irish regulator has moved to issue regulatory guidelines on credit union lending comes as no surprise. What's really surprising is the content of its regulatory guidelines which are indicative of the scale and scope of problems inherent within the way things are done by credit unions. This content and the Regulators recent published speach on credit union issues demonstrates the dearth of credit union compliance and effective governance at this time.

http://www.ifsra.ie/frame_main.asp?pg=%2Findustry%2Fin%5Fcar%5Fintr%2Easp&nv=%2Findustry%2Fin%5Fnav%2Easp

Taking these together they make worrying reading indeed particularly as in reponse credit unions will have to invest heavily in effecting the changes necessary of they are to come up to speed with modern lending and credit risk practices required of regulated financial firms.

For example the guidelines address repayment capacity lending which is something one might have expected to be the norm for credit unions. It is not. Also required is accessing credit rating or credit worthiness information via a credit bureau. Yet only about 20 of 434 credit unions are currently members of a credit bureau. Commercial or business lending requires specialist skills that almost all credit unions do not have and if they do they may have but one person capable of assessing the risks inherent within business lending.

The guidelines also address the thorny issue of bad debts amongst other things and critically requires a credt unions IT systems to be fit for use when it comes to reporting on loan delinquencies which many of them are not. Similarly manipluation of provisions , another hot topic is addressed.

"The substantial inflow of liquidity to credit unions together with certain ill conceived strategies within the movement have increased the pressure for credit unions to move into the mainstream lending market, in competition with the banks. This has sometimes been done without due regard to the borrower’s ability to repay, in the absence of any credible credit check or without the taking of viable security. Credit unions should now critically re-examine their credit policies in the light of the changing external environment. " RCU Speach to National Supervisors Forum 2007

Whether credit union boards and their managers realise it, responding to the guidelines represents a significant and large scale change to the way in which business is done. Such change will require careful planned execution if credit unions are to adopt the guidelines and achieve compliance status. For the vast majority, if not all credit unions, this will require skills they do not currently possess. It is not a simple matter of addressing lending policy but is a roadmap for core business process change that will take time and resources to accomplish. Unfortunatley change is not something that credit unions do well ....