Governments €400bn shores up Irish Banking System

Governments €400bn guarantee of 4 Irish banks and 2 building socities was sensationally triggered overnight in response to the collapse of the banks shares prices on Monday. The six are Bank of Ireland, AIB, IrishL&P, Anlgo Irish Bank, Irish Nationwide and EBS Building societies.

Even with the short selling ban, international investors were wholly unconvinced that Irish banks were as safe as they claimed to be. At close of business Monday it was obvious that unless emergency action was taken by government the game would be up for one if not two of the four quoted banks on Tuesday as instititional depositors were already engaged in heavy withdrawals.

Had one of the banks failed then the game was also up for credit unions who have billions on deposit with the six credit institutions now afforded protection under the new state guarantee. It would have been all over for credit unions within days.

Today credit union deposits in these six institutions are fully guaranteed by the state and credit union savers have a €100,000 deposit guarantee. However neither credit union assets or liabilities are guaranteed by the state.

Irelands property related debt mountain is going toxic which is codespeak for real financial hardship for ordinary people and small businesses who are defaulting on their loans as a result of an official economic recession.

The states €400bn guarantee is directly related to international concerns that Irish banks were far too exposed to property related lending.

Credit unions are also heavily exposed to property related loans. Many people have unsecured credit union borrowings used to finance what are now unaffordable lifestyles. They borrowed to part finance homes that have lost upwards of 30% of their value with no sight of a bottom price. As businesses downsize or fail thousands are losing their jobs many of whom are traditional users of credit union debt. Anecdotal evidence is one of increasing loan delinquency that has yet to feed through in credit union bad debt provisions and loan write offs.

Experience tells us people will continue to make their mortgage and utility payments but will default on unsecured loans. Just how much of the credit union loan book is exposed to this scenario is hard to quantify - it is an exposure credit unions must understand and be transparent about now. Bad lending practices such as refinancing dodgy debt, manipulating loan arrears and other tactics will backfire dramatically as regulatory scrutiny of all lending institutions will intensify.

The credit union challenge is honestly dealing with bad loans and lending safely in a recession. Liquidity may not be a big issue but solvency and the ability to safely leverage will be one of the most closely watched capabilities of any credit institution large or small. The danger is credit unions will be tempted to relax lending criteria in response to real member hardship. This could exaserbate credit risk and impair what is already a thin solvency base.