"The Registrar of Credit Unions in the Financial Regulator is working closely with ILCU to approve a reform to SPS. It is expected that these discussions would conclude shortly.
It is intended that the guarantee that has now been announced for credit institution savers would act as a backstop to an approved SPS scheme for credit unions." Minister for Finance 20th Sept '08 http://www.finance.gov.ie/viewdoc.asp?DocID=5466
How the Deposit Guarantee Works
Legislation has yet to be produced and enacted to give effect to this credit union arrangement. Until it is, credit union savers are not as protected as the ILCU would have them believe they are. See here: http://www.irishcuvoice.com/2008/09/ilcu-cockcrow-lacks-authenticity_22.html
It is not a direct government guarantee. It's a guarantee that compensation will be paid out of the deposit guarantee scheme. This scheme holds a fund (deposit account) to be used to settle depositors claims arising from a defaulting credit institution (credit union). If the fund runs dry it can be topped up by the Central Bank who afterwards will get their money back from the members of the scheme. This means that credit institutions foot the bill when one defaults. Not the Government. But in cases of severe shock the Central Bank may not look for its money back for some time , if ever. In which case the taxpayer foots the bill.
So what's the Backstop to the SPS about ?
We don't know yet. But there are some hints that may help.
Stabilisation is not Deposit Insurance/Guarantee
The ILCU "SPS" is a stabilisation scheme. It never was a deposit insurance scheme and never offered a guarantee. This has come as a shock to the many credit unionists who thought it did and reacting to large deposit withdrawals over the past few weeks. For example listeners to LiveLine were told by one credit union director credit union savings were guaranteed, when they weren't at the time.
Stabilisation is a credit union concept where originally credit unions clubbed together and established a fund to provide discretionary assistance to a credit union in trouble.Typically funding takes the form of guarantees, liquidity or solvency supports. In some jurisdictions, where such schemes are subject to legislation and regulatory oversight, a workout plan and its funding require regulatory approval and the approval of a deposit insurer. Stabilisation schemes dissappeared in the US in the early 70's when they were replaced by credit union deposit insurance. They continue in Canada but they are subservient to provincial and state deposit insurance objectives.
Deposit Insurance compensates savers following credit institution default (Deposit Guarantee) It may include for risk minimisation assistance where the deposit insurer, usually a government body, makes assistance available subject to an agreed business plan that demonstrates the bank etc. has a viable future. Private deposit insurance was discredited in 1992 when Rhode Island's private scheme (RISDIC) collapsed triggering the closure and state bail out of its credit unions. See here : http://www.irishcuvoice.com/2008/03/deposit-insurance-and-irish-credit.html and here http://www.irishcuvoice.com/2007/10/echoes-of-rhode-island-ilcu-sps-reforms.html
Legislative basis
The Credit Union Act provides for regulatory approval and regulation of savings protection schemes (section 46). Its wording may be broad enough to cover both deposit insurance and stabilisation schemes. Credit unions must participate in an approved scheme since 2001. As a scheme has not been approved to date, every credit union has been carrying on business in breach of the law.
The Financial Regulator has set out conditions any scheme will have to meet if it is to be approved. The ILCU has sought approval of its SPS and "discussions" have been ongoing since 2003 and have broken down at least once. Essentially the Regulator wants to approve an independent scheme, with its own independent board, staffing and funding which is open to all registered credit unions to join. It also included a conditio for the scheme to provide a deposit guarantee. The ILCU has been unable to agree to this. Presumably the guarantee condition is now redundant.
The O'Toole Bill, published in February 2007 in the Seanad, legislated for Irish Credit Union Savings Protection Company; a statutory deposit insurance/guarantee scheme including stabilisation provisions for credit unions. http://www.oireachtas.ie/viewdoc.asp?DocID=6992&&CatID=59&StartDate=01%20January%202007&OrderAscending=0
The Bill was withdrawn during its second stage hearing in March 2007 as Government said the Financial Regulator was working closely with ILCU to approve a reform to SPS and expected that these "discussions" would conclude by the end of March 2007. Discussions did not conclude in March 2007 and haven't concluded since.
Approving a reformed SPS - what it could mean
A reformed SPS could work as a stabilisation scheme for its members. Should the scheme managers decide to provide support to a credit union, the regulator could approve subject to it being satisfied the stabilisation plan would work.
Should either the stabilisation plan fail or the schemes manager decide not to provide support (the credit union could not survive even with assistance) then on default the deposit guarantee scheme and its compensation to savers would apply. This could be what is being termed the "backstop"
The question of membership is an open one. The scheme could be compulsory or voluntary. The regulators conditions for approval require a stabilisation scheme to be open to all credit unions regardless of affiliation to or membership or not of a trade body.
What is uncertain is whether or not the deposit guarantee would apply where a credit union does not participate in an approved SPS. It would be an incomprehensible decision if it did not.
Broader policy dimension
The regulation and supervision of credit institutions, including credit unions is the responsibility of the Financial Regulator and no other body. Deposit insurance for credit union savers as with banks depositors must be responsibility of the Central Bank and no other body.
A credit union stabilisation scheme should be approved, regulated by the Financial Regulator and also subject to Central Bank oversight as a deposit insurance provider. It may well be the case the Financial Regulator requires a stabilisation scheme to plug a significant gap on the credit union financial safety net. That gap is the provision of emergency liquidity supports similar to the lender of the last resort function of the central bank.
It is widely accepted the credit union movement must rationalise. It may also be the case the RCU considers that credit union rationalisation (mergers) will need to be funded through stabilisation supports. Canadian credit union stabilisation funds are regularly used to fund mergers where a troubled credit union is taken over (merged) by another.
Elsewhere stabilisation powers are subject to robust specific legislation and are regulated by state bodies. One recent media report stated the Financial Regulator is looking for a statutory SPS. http://www.irishtimes.com/newspaper/finance/2008/0926/1222374594810.html
A key policy consideration is the legal certainty, and statutory status of any approved stabilisation scheme. It has long been the ambition of the ILCU to evolve as an in-system regulator similar to some Canadian Central Credit Unions. As the Financial Regulator will be more than aware of the legislative and regulatory basis underpinning Canadian Central,. it's requirement for statutory recognition of any Irish stabilisation scheme is a sound and prudent position. See here for a more detailed treatment http://www.irishcuvoice.com/2008/08/canadian-expose-debunking-ilcu.html "Canadian Expose Debunking the ILCU Pipedream"
Stabilisation scheme funding
Stabilisation funding could come from a fund established by an SPS scheme manager or funded from the Central Bank deposit guarantee account.
If the fund is with the stabilisation scheme manager, then it could also be used to fund merger costs under a workout proposal. In this case SPS funding would be separate to Central Bank deposit guarantee funding.
In addition or alternatively, with the approval of the Financial Regulator (RCU), the stabilisation manager could request stabilisation funding from the Central Bank deposit guarantee account to be repaid at some future date. For example some Canadian central credit unions may call on provincial deposit guarantee schemes for stabilisation funding where they are empowered to do so under state legislation. Canadian Centrals as legislated and regulated credit union entities are empowered to operate stabilisation funds. (see here for more in depth discussion on the role of Canadian Centrals http://www.irishcuvoice.com/2008/08/canadian-expose-debunking-ilcu.html)
What would happen to the existing SPS fund?
It could either be (a) retained as a fund by an approved stabilisation scheme manager or (b) used to fund credit union contributions to the Central Bank deposit guarantee account. It depends on how stabilisation will be funded. Of course it also depends on ILCU ambitions and its member credit unions demands.
Is this possible to approve a reformed SPS under existing legislation ?
It would appear a stabilisation scheme, meeting the Regulators conditions for approval, could be approved under the credit union act. Such a scheme would be regulated by the RCU.
Compulsory membership could be required under the CU Act - however should the RCU approve the Central Banks scheme under section 46 then as all credit unions will be members of this scheme they would fulfil their legal requirement under the CU Act. On balance it is probably a good thing that all credit unions have access to stabilisation supports.
It also appears the Central Bank may be able to provide stabilisation type funding under deposit guarantee regulations.
Extending the deposit guarantee scheme to credit unions requires some amendments to existing legislation.
Funding Implications
Deposit Guarantee Scheme (The €100,000)
The current deposit guarantee scheme funding requirement is .20% of eligible deposits. This may be increased under the new limit. However it may not.
Assuming it is not increased: Credit Unions will need to deposit .20% (minimum deposit €24k) of all shares and deposits. It would appear on their balance sheet as an interest earning asset - deposit with the central bank. This differs from the annual funding fee charged by the ILCU SPS which is expensed to the P&L. As credit union deposits increase they would need to top up the central bank deposit to ensure it remains at 0.20%.
Stabilisation Funding
Depending on the SPS scheme approved and its funding requirements there are two scenarios:
(1) Stabilisation manager manages a fund.
In this case funding would be separate and additional to the deposit guarantee scheme. The question is what happens to the existing fund of €110m which would probably be sufficient as a stabilisation fund under normal market conditions.
It is likely the ILCU will want to retain the use of all or some of the existing SPS fund to continue to provide assistance to its Northern Ireland members. It has argued it needs to do so. What the ILCU does with the fund is subject to its members agreement. Resolving the future of the existing fund could see the ILCU retaining some of the fund for its NI credit union members under its existing SPS arrangements and transferring the balance to an approved SPS in the South.
(2) Stabilisation manager can call on Central Bank for funding. Here the the scheme manager may or may not have a standing SPS fund. It could call on support from the central bank deposit guarantee account. It could be the case then that credit unions may be required to maintain a higher level of deposit given their unique risk profile and stabilisation requirements.
Conclusion
The SPS saga that has taxed the credit union movement, for so long may be drawing to a close. The credit crisis has solved for a credit union savers guarantee. Government was forced to increase the limit to €100,000 and to include credit union savers.
Moral hazard considerations seem to have taken a backseat for now. Then again perhaps credit union moral hazard is what a "backstop" will be engineered to manage. An approved effective stabilisation system could enhance the credit union financial stability tool kit.
Whatever "backstop" means, the time for ILCU procrastination and foot dragging is over. There is far too much at stake. Its credit unionist rhetoric will not be accepted by a public that knows the credit crisis is far from over.
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