Canadian Expose – Debunking the ILCU pipedream

Canadian Expose – Debunking the ILCU pipedream

Canada has evolved a system of regulation, supervision, stabilisation and deposit insurance the ILCU has sought to copy and develop in Ireland. The majority of Irish credit union directors and boards are completely unaware of this ambition. Canadian government and provincial state policy differs dramatically to both Irish and UK government policy in respect of laws, regulation, supervision and deposit insurance. Ireland has adopted a super regulatory system through which power has been devolved to a statutory officer the RCU. It is this office which is responsible for the regulation and supervision of credit unions. However as the CU ACT 1997 was badly designed law as the RCU cannot operate with the degree of flexibility required to respond to the emerging risks to the instability of the credit union sector.

In Canada regulatory powers are split between the overall banking authority, the deposit insurance corporation and provincial central credit unions. These latter bodies are owned by credit unions and act as the credit union central banker. The are incorporated regulated and supervised bodies under Canadian credit union legislation. These central credit unions provide liquidity services to credit unions who must under law deposit their excess funds with the central credit union.

Canadian state authorities have powers of stabilisation exercisable when a credit union is placed under “supervision”. The authority places the credit union “under supervision” where it has wide ranging powers to instruct action to redress financial stress. The authority may devolve its powers to a qualifying credit union central which has demonstrated a capacity and competence to exercise such stabilisation powers. In all cases the overriding concern is that depositors’ funds are secured. Credit Unions may also establish a stabilisation fund to finance interventions under the stabilisation regime and other interventions. Not all provincial centrals have a stabilisation fund. Ontario has a stabilisation central credit union which has supported troubled credit unions, mainly financing merger costs. The Canadian credit union system continues to rationalise with many mergers taking place as small credit unions cede independence merging into a larger credit union.

Central Credit Unions in exercising devolved powers of stabilisation when dealing with credit union placed under “supervision” may provide financial assistance. They do so by borrowing from the Deposit Insurance Scheme – a state body. They may have their own established stabilisation fund – held in a separate body. But the fact is the deposit insurer calls the shots – thus the pre-eminence of protecting deposits is maintained. In turn the deposit insurance scheme is backed by stand by line of credit in effect the full faith and credit of the Canadian government.

Central to the financial stability of Canadian credit unions is the provision of central bank type facilities by central credit unions. CCU’s provide liquidity, ALM, access to the clearing system and inter-credit union funds transfers. They also provide trade body services to their members. The provision of the latter service is secondary to their primary function of central bank type operations. They are externally rated by credit rating agencies and may raise funding from wholesale money markets and issue funding instruments. They have access to government backed stand by lines of credit. In this way the full faith and credit standing of the Canadian state backs the deposit insurance scheme and the operations of credit union central bankers.

It is because these were in place that these entities were permitted under law to exercise powers of stabilisation under credit union supervision regime.

It is not a system designed to secure the credit union at all costs. It differs entirely from the Irish stabilisation system which is designed to secure the future of the credit union at all costs. In practice however rather than failing, Canadian credit unions are merged into larger credit unions. Indeed this has been the experience in the US as well, although the UK has experienced a number of micro (smaller than small) credit unions failing. The existence of deposit guarantees, supervision status and powers to enforce work-outs, all of which are regulated by Government agencies has meant that public confidence in credit union stability and safety of savings remains high – members of troubled credit unions do not run. Instead they vote to merge with safer credit unions.

This is entirely different to the Irish model which has never developed a central credit union entity and does not contain the legal obligation for credit unions to participate in such an arrangement. Whereas centrals appear to be self-regulatory, they can only exercise these powers as they are legally incorporated under credit union laws, which subjects them to strict regulatory oversight.

The ILCU is nothing like a Canadian Central Credit Union. It is an unincorporated entity which is not incorporated in the same way as Canadian central credit unions. It does not act as the credit unions central banker. Does not offer access to the clearing system nor has it an inter-credit union funds transfers.

It does not have devolved powers of stabilisation under a credit union supervision regime. It maintains a stabilisation fund which is not incorporated within a specific regulated legal entity. Its funds remain intermingled with its general funds and thus are open to be used for purposes other than stabilisation and can be attacked by ILCU creditors.

The Irish system contains only a regulatory authority which is hide bound by poor laws that were designed ad-hoc in 1997. Irish law unlike Canadian legislation did not design the financial safety net and focussed only on credit unions and how they would be regulated and supervised. This was despite the existence at the time of Canadian and US legislation that could have and should have been used as a template or benchmark.

The Irish system is critically flawed- to such an extent the very system itself actually undermines it primary objective – to ensure financial stability. It deals only with the individual credit union and did not design the financial safety net context that these independent entities should sit within. Why?

The principal failure of the legislature results from its captivity of the institutional interests of a trade body, the ILCU. The act was mainly designed by the then regulator and the ILCU. The regulator was almost entirely compromised by years of close co-operation with the ILCU as both evolved an all too cosy self-regulatory system under 1966 laws. Furthermore the regulator was overseen by the Department for Enterprise and Employment and not the Department of Finance, which had oversight of credit institutions (banking system). The root of credit union law lay within laws enacted in 1898 for provident societies. It is no surprise then to find the 1997 laws did not deal with the full context of credit unions as credit institutions and the design of an appropriate effective financial safety net. The powers of the regulator are severely and dangerously restricted within primary legislation with no flexibility allowed to urgently respond to risks as they emerged. For example the most recent guidelines on lending and investments are at best voluntary and are not binding on a credit union. In Canada the Deposit Insurance Corporation (a state body) has the powers to issue by-laws that are binding on credit unions. It does not have to resort to changing the primary legalisation. The Irish act was quite deliberately designed to shackle the regulator – why?

Again the trail goes back to the ILCU. Its ambition was statutory recognition as a type of credit union central body. What it was after was its statutory recognition as a self-regulatory body and the statutory recognition of its stabilisation powers and fund. Thus it was important that regulatory flexibility – the setting of by-laws etc should sit within the ILCU system and not within the state system. In effect it wanted the state to devolve powers to it. In this way its strategy would allow it to evolve as a central credit union.

But as with all such moves the ILCU failed to deliver. It was seen then as it is today as an amateur body unable to deliver on its promise.

The pace of development in Canada may see the two largest credit union centrals merging – British Columbia and Ontario creating a larger central banker with greater financial muscle in the marketplace. The Canadian system is similar in some respects to the federated system evolved in Europe – for example the financial co-operative RaboBank. The concept of subsidiarity is both voluntary and obligatory (legal obligation to maintain liquidity with the central credit union).

Recently in its strategy for the movement the ILCU central credit union ambition again re-appears. The ILCU is positioned itself as providing central treasury services and stabilisation. Critical to the development of both is the IS or data required which is of course the main objective of the IT strategy. Taken together then Treasury, Stabilisation and IT create the platform for developing as a central credit union similar to Canada. But and this is the BIG BUT this strategy is not based on a realistic appraisal of capabilities and or the commitment of stakeholders.

The funding costs of establishing such an entity are not provided – the "Strategy for the Movement" document amounts to pieces of a jig saw that don’t quite fit…there are missing pieces. These are the legal basis and more importantly supporting government policy and an empowered regulator. Key to unlocking this ambition are revised laws that permit its development. More importantly and this is where the ILCU have gotten it so badly wrong, will be the establishment of a statutory state backed deposit insurance scheme. This is the missing piece the ILCU remains stubbornly opposed to. It is fundamental part of the structure of the financial safety net and one which has to be in place before anything else can be and will be allowed to develop.

In the final analysis the ILCU and its member credit unions haven’t the ability, resources, competence or commitment to effect the changes needed to make the strategy work. Execution will take a fundamental change in behaviours and attitudes that this generation of directors are simply incapable of making. Most important of all, credit union directors are too old – they will have the energy to make the commitment needed for changes required.

The sector may well experience a major crisis triggering urgent Government intervention. It is this intervention which will decide on the future fate of Irish credit unions. In Canada credit unions buy bank branches – the prospect here is that the opposite may happen. This crisis is not too far off now and may happen within the next 24 months or so. If so it will happen during an economic downturn which will amplify the severity of the intervention required. It won’t be nice. Many credit unions will be forced to rationalise. Indeed the prospect of nationalisation with the sector placed in supervision mode is a likely scenario. If it happens it will happen quickly and with speed. Credit unions and their leadership will not be ready for it and many will resign. Billions may be withdrawn in a combination of overt and silent runs – it is already happening. People are moving their money elsewhere as credit union dividends collapse in 2007 and 2008. No longer do people see credit unions as a safe place to save.

In the past 5 years the stand off between the ILCU and State has undermined credit union stability – pussy footing around with savings protection has denied savers the protection they will look for should a crisis start. One they realise their money is not protected they will take it out – it’s a simple at that. This process may start in earnest later this year when credit unions will announce record reductions in dividends and publish accounts showing large investment losses. It is sad but predictable – the credit crunch effect has speeded up the fateful day when the credit union movement will be faced with its greatest ever challenge – that of survival itself.