ILCU Proclamation lacks Authenticity

It didn't take the ILCU long to roll out its rhetoric. Cheap point scoring in its press release today underscores its lack of authenticity in the face of the credit crunch. It loudly proclaims "Credit Unions Now Safer Than Banks for Savers". It is clearly out of touch with reality. It goes on to to claim "Credit Unions have double protection" implying they are "guaranteed".

The deposit guarantee does not apply to credit unions it applies to the savings of ordinary people should their credit union fail. Not for the first time is the ILCU playing fast and loose with the facts.

Minister for Finance, Brian Lenihan's announcement of an emergency measure to shore up savers confidence followed a week of rumour that some credit institutions were experiencing runs. His urgent response was to increase deposit guarantee levels to €100,000 and include credit unions for the first time. Just how this will be done remains to be seen.

Why did ordinary people panic? It was largely down to the Irish deposit guarantee being the lowest permissible under EU law since 1995. Yet Government got a clear wake up call last year when billions were exposed during the Northern Rock run. There was nothing preventing it from raising the guarantee level.

Just what were government and its officials doing since? The answer is it appears very little indeed. The Minister said deposit guarantee limits were only being considered by his officials since July of this year, fully 10 months after the Northern Rock crisis.

Last Saturday, Minister Lenihan was seen to being doing a good deed. In fact he was forced to react to a very real crisis that had nothing to do with callers to national radio programmes. He got lucky.

So too did credit unions as they too were experiencing heavy withdrawals as savers realised how exposed they were.

ILCU cock crowing from Mountstreet that "credit unions are safer than banks for savings" is naïve and downright silly. Naïve because credit unions are not safer than banks. And silly because it is cheap point scoring. It lacks the integrity and maturity required of a professional organisation in the middle of a crisis.

There hasn’t been a public run on an Irish bank in living memory. The last major run was probably the Great Munster Banking collapse in the 1820’s when the local economy contracted after the boom Napoleonic war years.

Yet, the last public run on a credit union was just over two years ago in Monaghan when the SPS failed to do its job.

Irish banks have access to Central Bank lender of last resort supports through which billions has been made available in liquidity supports in recent months. Credit Unions have no access to lender of last resort facilities. In the event of a credit union liquidity crisis the SPS, if it was made available, would probably run out of funds within days.

As far as solvency is concerned, banks and central banks can resort to various measures to shore up solvency. Credit Unions cannot and can only rely on ILCU largesse. In any event the SPS fund could supply a meagre €110m to a system that has over €14bn in risk assets exposed to rising loan delinquency and investment losses.

Claiming the average credit union deposit is less than €5,000 is highly selective use of data when hundreds of thousands of savers have significantly larger sums on deposit.

Above all Irish banks are too big to fail. No credit union has this standing. The simple fact of life is should one of the retail banks fail credit unions are in serious trouble : should a credit union fail none of the banks would be effected.

The ILCU might want to consider the Deposit Guarantee Regulations before its members credit unions repeat its banner headline : “Except with the prior written consent of the Bank, a credit institution authorised or formerly authorised by the Bank shall not advertise or cause to be advertised the fact (however expressed) that deposits or funds placed with the credit institution are protected by or through the deposit protection account.”

It might also want to address its errors of fact in its internal note to members. The guarantee is not a Government Guarantee but a guarantee under the DGS. The guarantee applies to the savings of eligible depositors (members savings accounts) and not the credit union. To state a credit union has double protection is simply wrong. It is also language that promotes moral hazard.

By all means welcome the guarantee, talk about the SPS, and get the facts right. But don’t claim credit unions are safer than banks.