Perpetual Crisis - The aftermath tackling the fundamentals

In Perpetual Crisis – A fundamental reality that confronts the Movement

The perpetual bond saga is a symptom of far greater problems with the credit union movement, its financial safety net, financial stability and survival.

In pursuing its own agenda, the ILCU has facilitated the decline of credit unions to a point where their financial stability is so threatened there is a very real and growing danger of systemic destabilisation.

The credit union business model is failing fast. The ILCU institutional form has already failed to deliver value. It has become a classic value destroyer whose activities have directly and indirectly resulted in the expropiation of millions in community capital – ISIS and Perpetual Bond losses alone are over €110m.

But its misguided ambition remains: It wants to evolve as a central credit union for all Irish credit unions. Despite nearly 20 years of trying, it is further away now than it has ever been. It remains blind to the reality that confronts it; it is the prime body that has prevented, hampered and frustrated credit union reform and modernisation.

Its misguided ambition was articulated in its submission on investments in 2006:

"The long-term aim of the credit union movement is to build, own and operate a centralised treasury operation around a newly developed, and Financial Regulator approved, unit trust that would manage the credit union movement’s investments. This centralised treasury model is well established in the credit union movements in America, Canada and Australia. The legislators and regulators in these countries insist on the credit unions using the central treasury operation. Such an approach from the equivalent authorities in Ireland would have a very positive effect on the management of investments by credit unions in Ireland.(ILCU Submission on Investments to the Department for Finance 2006)

The central treasury model is not a “unit trust” in any of these countries. Once again, as with Deposit Insurance, the ILCU was playing fast and loose with financial stability concepts to benefit its own agenda.

Both the CIM and CMTF (Unit Trust) are unregulated and unsupervised as “central credit union entities”. Of course the CMTF is regulated as is every other authorised collective investment scheme in the state – but it is not a regulated credit union central treasury entity.

Neither the ILCU nor its advisers have any statutory role, responsibility or accountability for the central management of credit union funds. Many consider it is highly imprudent of the Irish government to continue to allow for such an unregulated unsupervised system.

Central treasury operations are provided by “Central Credit Unions” in the US, Canada and Australia. They are sophisticated regulated banking type operations providing liquidity, wholesale funding and other central services such as access to clearing, etc. The are empowered and incorporated under credit union legislation and are regulated and supervised by credit union regulators.

They operate as a credit union “central banker” many probiding quasi lender of last resort(LOLR) facilities - some are backed by the full faith and credit of the state. In some cases such support is indirect through deposit insurance schemes (Canada).

In Canada and Australia these central credit unions are operating on a similar basis to the federal RaboBank or German/ Austrian Raiffeisen co-operative models. For example RaboBank is a bank owned by 400 odd small co-operative banks.

Centrals have robust governance systems including risk governance, management and internal controls. They even have ratings -the Australians issued a bond in 2006 which carried in part a “AAA” rating. Their existence is the reason why credit unions provide mortgages as they can access to wholesale funding required to support mortgage books.

Canadian and Australian Centrals own subsidiaries that are brokerages, insurance companies, credit card issuers etc. They provide access to clearing and a host of IT based products that credit unions on their own could never hope to provide.

The US differs due to scale and history – but all states have a central etc. Other central services are provided by different entities called CUSO’s. These are companies owned by credit unions such as IT companies, wealth management etc and provide services to their owners and other credit unions.

Centrals actively promote, facilitate and finance rationalisation (mergers) which has seen the reduction in numbers of credit unions – but not outlets or customers: the latter two have grown not shrunk as has the breadth and scope of products and services offered.

Central credit unions are a necessary component of a well designed financial safety net. Credit unions are obligated to place all of or a significant portion of excess funds with them. Centrals stand alone and are specifically legislated for and regulated by credit union regulators. They are viewed as critical components of governmental policy in the control of credit union risk taking and protection of savers funds. Their existence has allowed credit unions to offer better products and services – mortgages etc. Such entities are fundamental to the design of the financial safety net, ensuring credit union financial stability and growth.

Such a system is a huge missing piece in Ireland along with a state owned deposit insurance (guarantee) scheme.

If a central credit union system is ever to be developed it cannot sit within the ILCU system. However there is no reason why existing services provided by the ILCU cannot sit within a Central, as is the case in Canada or separate as in US. In Canada, Centrals also act as trade bodies – but whilst owned by credit unions they are not controlled or dominated by them in the way the ILCU is dominated by its members. Governance is what would be expected of incorporated bodies of such national importance to financial stability.

Developing a similar system here will require a fundamental shift in Irish credit unionist thinking about “independence” and a mind shift towards a federalist subsidiarity. Everywhere else laws are written to establish and empower central credit unions and similar entities. The same will have to happen here if credit unions are to survive.

But the ILCU won’t hear of it. It has a strategy to evolve into the RaboBank of all Irish credit unions, North and South. The problem is it’s starting 30 years behind the game line and hasn’t the resources or professional competence to build the system. Neither has it the trust and commitment of its member credit unions. Critically it hasn’t the reputational capital to persuade government either here or the UK to legislate to allow it to become a central credit union entity. It insists on trying to manufacture a silk purse from a sows ear.

The fundamental issue is this. The credit union institutional collaborative system, the ILCU, is the real problem. Far less than the sum of its parts, it is a failed entity – a classic value destroyer. Unless this problem is tackled, it will remain what it has been for over 20 years the single greatest road block to a sustainable future for Irish credit unions.

Irish credit unionists need to develop new federated structures through which they truly co-operate to survive. Government will have to heed the perpetual wake up call by designing and implementing a proper financial safety net. If not the perpetual saga of one crisis after another will continue and credit unions will eventually disappear.