Regulator and Media Highlight Credit Union Investment Losses

Both the Irish Times and Examiner have highlighted credit union stories in the past week that have highlighted the scale of challenges facing credit unions.

The Regulator, Registrar of Credit Unions, Brendan Logue has written of a need for liquidity supports and in a hard hitting speach once again highlighted credit union investments and lending as key issues.The content and tone of the Regulators message is once again robust and forthright.

Referring to loans he said "Lending for personal needs was the traditional purpose of credit union loans but in recent years loans have increasingly been advanced for business capital, project finance or even, in a small number of cases, for speculative purposes. Consequently, the lending model has changed substantially in some credit unions without a corresponding improvement in risk assessment capabilities and this has given rise to substantially enhanced credit risk."

Commenting on investments he said "the biggest change of all has happened due to the enormous accumulation of surplus funds which has developed over the past ten years.This change has had a negative effect on the financial model, profitability and ethos of the movement. Had these surplus funds been invested in a conservative and prudent fashion and held on behalf of members separately from the affairs of the credit union, the investment losses of the past year could have been avoided."

He went on to say "The idea that community funds should be invested in bonds or equities issued by institutions whose connection to local communities is at best unclear, or even in some cases in derivative products whose operations were not understood by board members, and in contravention of our guidance, is hard to understand. Such ill-conceived strategies have resulted in reduced profitability and dividends in credit unions and in a loss of credibility for the movement."

Getting to the heart of the matter he said "Many of you will be aware that my office sought for many years, to change what we considered to be an inherently risky and inappropriate investment strategy operated by credit unions. This process of reform proved quite difficult and did not receive adequate support from some groups within the movement. A lengthy and convoluted consultation process delayed the introduction of investment guidelines which were ultimately issued in October 2006. When I used the words “investment strategy” I did so advisedly because what occurred in the area of credit union investments was not a series of random events but arose from movement policy. "

The Examiner carried a story of credit union losses of €700m in a article written by Bill Hobbs ex CEO CUDA who was responsible for the publication of its Call to Action report in 2006. Hobbs' estimates of investment and loan loss impairment were refuted by the ILCU not because they were inaccurate but because the ILCU maintains no one knows as credit union audited accounts have yet to be published this year. In an interesting radio tussle, in one programme an angered ILCU said credit unions were not exposed to the sub-prime crisis as claimed by Hobbs. In a later radio interview Hobbs said he had never said they were adding the ILCU should read his article in which he wrote credit unions were "more exposed to the global crisis, domestic property collapse and recession" where the global crisis had led to the collapse in financial assets credit unions had invested in.

The ILCU was at pains to point out that the average loan was small at €8000 for "household events and cars etc" and lending to business was only 5% of the loan book !

Yet larger credit unions average loan is over 100% higher than the ILCU stated average and they are quite proud of business lending which for many is much higher than the 5% suggested by the ILCU. For example one leading credit union was involved in court action to recover a business loan of over €1m and another mid-sized credit union admitted to breaching loan limits in advancing a €1.5m business loan facility. It appears that ILCU estimates of business lending may be a wee bit too low not least because in one category, social finance, it has claimed lending in excess of 10%.

Not that it really matters as bad debt provisions have been far too low for the past 5 years as many credit unions sought to maintain high dividends streams. In a highly unsual case one leading credit union increased its bad debt provisions by €1m not from operating income but by transfer from its reserves to meet resolution 49 provisions. In yet another no provisions were made at all for over 4 years despite a growing loan book.

It is yet another case of regulatory and media commentary highlighting serious issues where the ILCU has refused to face up a reality that the crdit union movement is facing a very real crisis.