Crisis continues to effect ILCU Central Treasury Trust

The good news of the apparent extension of the deposit guarantee scheme with its increased limit of €100,000 to credit union savers came at almost the same time as the Sunday Times highlighted worsening problems with the ILCU Central Treasury Trust.

The unit trust is exposed to floating rate notes that are currently trading below par in what is a highly illiquid market. Whilst capital should be repaid at maturity by a creditworthy borrower on what are normally highly liquid assets, the continuing crisis has impacted adversely on their open market value.

When introduced some observers questioned its suitability as a credit union treasury vehicle pointing out that as an open ended collective investment scheme it could not of itself provide a capital guarantee.

In March 2006, the ILCU said “the objective of the Central Treasury Managed Fund at all times is to provide credit unions with a competitive rate of return and instant access to their funds without putting the capital value of their investment at risk. The primary investment goal is always to prevent any loss of capital and this has never occurred to-date in the Ongoing Fund” (ILCU March 2006)

But instant access could result in a capital loss if activated today. As the CTT is priced below par and has been since at least December 2007, credit unions will now have to show losses in their annual accounts this year. Current estimates put these at c€40m at the current unit price.

What is not known is the scale of losses being incurred on other credit union investments, how badly liquidity is impaired and the effect this will have on credit union accounts, dividends and solvency.

The credit crisis is far from over and a deposit guarantee whilst a comfort to savers, is hardly a comfort to credit unions exposed to investment losses and impaired liquidity.

The Backstop and the SPS

There's nothing worse in the middle of a crisis than political ambiguity. Governments' increase in deposit insurance coverage to €100,000 and the inclusion of credit union savers for the first time has been somewhat confused by its reference to the guarantee being a backstop to an approved SPS.

"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.

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.

Government announces Credit Union savings protection of €100,000

It would have been a shame to waste a good crisis !

The Irish Government has acted swiftly in the face of growing public disquiet and has announced an increase in DGS limit to €100,000 up from €20,000. Credit Unions it appears are to be included under a revised DGS. The new guarantee will be for 100% of the €100,000 doing away with the co-insurance element of the existing limit. Just how it will work for credit union savers is uncertain.

Governments action closes a serious gap in credit union savers protection that existed since 1997. It is almost two years ago since CUDA called for the inclusion of credit unions in the state DGS.

"The savings of members of Irish credit unions deserve better protection which should be on a par with that offered to savers of other authorised credit institutions such as banks. There is no logical or prudential reason not to include credit unions in the existing State compensation scheme for customers of banks and building societies."
(CUDA Submission to Joint Commitee on Finance & The Public Service Oct 2006) http://debates.oireachtas.ie/DDebate.aspx?F=FIJ20061004.xml&Node=H3#H3

Finally Government has acted sensibly. It’s amazing how a crisis can focus minds on what really matters. Its decision to include credit unions within its DGS is a timely and necessary response to growing saver disquiet and recognition of members rights to proper protection.

It is likely Government will increase the limit through the simple expedient of Ministerial order. Credit union involvement should only require a minor legislative amendment. But its not at all clear if this is the case.

Since 2003 the ILCU has consistently failed to agree to Regulatory requirements for the approval of a regulated savings protection scheme. Government action ends this controversial chapter during which the ILCU effectively sought to deny savers their rights to a statutory DGS.

Credit Union savers may be thankful government has acted resolutely and provided them with one of the highest guarantees in the EU. It would have been a shame to waste a good crisis.

But its not quite straighforwrd it seems. There appears to be a twist in the tale. The guarantee is to act as a form of "backstop" to a reformed SPS.

"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." (Department of Finance Press Release 20th Sept 2008 http://www.finance.gov.ie/viewdoc.asp?DocID=5466 )

Just what is meant by "backstop" is unclear at this time. The Department of Finance could have been more forthcoming. Could this be evidence of residual political captivity?

One thing is certain,it is now up to the ILCU to get its act together, agree to the Regulators principles for reform and get on with the business of reform.

Any dilution of the effect of the governments announcement will not go down well with credit union savers. Their percpetion will undoubtedly be that they are being afforded exactly the same guarantee as the banks.

How the ILCU responds remains to be seen.

Credit Union Savers Exposed During Crisis

When is Government going to provide for a proper guarantee for the millions of credit union savers ?

Opposition parties are demanding an increase in the Banks DGS (Deposit Guarantee Scheme) to €70,000 in response to growing public disquiet. They are also urging the Central Bank to be more transparent on financial stability.

The Credit Crunch has exposed enormous gaping holes in the credit union financial safety net. In a climate of public apprehension runs can start and quickly become contagious.

Today’s Government assurance it stands ready to protect all deposits should not be considered as an assurance it will stand by credit unions.

There is no DGS in place for their savers who are increasingly questioning why their savings are not insured.

Of greater concern is there is no system of emergency liquidity support for credit unions. The ILCU stabilisation fund is not designed to ship emergency liquidity into the credit union system with the urgency a run would demand. It would undoubtedly fail to pass muster and thus contribute to the contagion.

In a credit union run the only tool available to the authorities is public reassurance. But authorities would be unable to back this up with concrete credible support. Any reassurance would be discounted by a worried public.

In March 2006 Government got a clear warning when the ILCU SPS failed to prevent a run on Monaghan Credit Union. The ILCU scheme had already been found unfit for use as a DGS during expert testimony in the High Court in 2004. It was subsequently forced to admit the SPS was only ever a stabilisation scheme in the Supreme Court.

It is incomprehensible that Government has not taken steps to deliver in its duty to implement an effective DGS for credit union savers. Instead it has behaved as a political captive of the interests of an industry body.

The full story is here: http://www.irishcuvoice.com/2008/06/roots-of-captivity-and-deficient.html

The ILCU SPS scheme is not a DGS. After years of masquerading it as one and despite the Supreme Court admission,it and its members have continued with the charade.The ILCU most recent declaration is "€110m Fund Protects Savers". Its members are claiming over the airwaves that savings are insured, misrepresenting LS insurance as a some form of deposit guarantee. People are expected to believe that a voluntary trade body has the resources, competence and systems in place to deal with a crisis. Yet not a scintilla of information exists on just how it would do so. Contrast this with the Central Bank and its competence, resources and tool kit.

Government has been caught in a bind of its own making. Chillingly in January this year it was still holding the line against a proper DGS:

" I have written to the Chairman of the Financial Regulator confirming my view that an approved savings protection scheme for all credit unions should be in place as soon as possible. In this respect the Chairman of the Financial Regulator has recently advised me that it is the intention of the Financial Regulator to deal with outstanding issues such as governance and funding arrangements for the scheme and to urgently find a solution to this issue. I will be monitoring progress towards this objective in the coming weeks."( Minister for Finance Oral response to Labour Party PQ http://www.joanburton.ie/?postid=935)

Government must now as a matter of urgency provide an assurance to credit union savers that their money has the same certainty of protection and the same guarantee level as savers with the banks.

As far as proper credit union DGS is concerned this can always be dealt with once the crisis passes.

Monty

HUGE Mitchelstown Credit Union uses the Mushroom Theory

“HUGE” Mitchelstown Credit Union & the Member as a Mushroom Theory
http://www.avondhupress.ie/story1.html
http://www.mytown.ie/town2,mitchelstown/news127,why-is-credit-union-losing-key-personnel.html

Once again Mitchelstown hits the headlines for all the wrong reasons. This time it seems its Board (not the credit union) was forced to respond to “mischievous rumours” of “going into liquidation”. A very odd concept for a credit union one would think. Maybe “liquidation” should mean “liquidity”? Could this be a liquidity story?

In any event it seems the CU is “awash with money”. It should be. It is after all a credit union that is only 35% lent.

The story within the story relates to what appears to be some quite significant governance issues.

There are three models in Credit Union governance. The balanced board/management model, the dysfunctional dominant manager and dominant board models.

It appears that Mitchelstown may fall squarely within the last category of an all too dominant board. It has a board of thirteen people along with nine committees who are quite busy. Commenting recently one director said:

“It’s a commitment that cannot be taken lightly. It is a huge financial co-op with membership totalling 17,000, shares and assets in excess of €90 million, loans of approximately €35 million and over €45 million in investments. To ensure that this is managed correctly is a huge task that takes many hours of careful consideration and consultation between investment advisors, board and management.”

No doubt the remaining Board members will have their work cut out for them. If a least to figure out just what size their credit union actually is, seeing another Director says it has “€100m in assets, comprising €35m in loans and €65m in investments and also have huge reserves”.

Since the beginning of the year it has lost its general manager, his replacement, its credit controller, assistant manager, its president and two supervisors. The latter resignations it seems are reportable to the regulator who presumably was informed.

It’s fascinating to watch this theme play out publically. Not one, but three board members have commented to the press, with differing messages winning the booby prize for media management.

To top it all on national talk radio we heard once again that grand Irish credit union tradition of the “the member is a mushroom” to be kept in the dark and fed a diet of credit union rhetoric. People were told that they would lose their "benefits" if they withdrew their money as a result of the rumours. Of course they were also told their savings were "insured".

No wonder the people of Mitchelstown are concerned. Refutation of mischievous rumour is one thing but explaining the loss of so many staff, supervisors and a president is something else altogether.

Update 29th September

Mitchelstown is once again on the hunt for a new manager, switching recruitment agents only weeks after confirming it had recruited a new manger but the appointment the board claimed was delayed due to “work commitments”.

Its membership will not be amused when it hears of the latest development in a saga that spilled onto the public airwaves. One of its directors rang into the popular talk radio show Liveline (RTE) to defend his credit union which was it seems experiencing substantial savings withdrawals. About 360,000 people heard its director claim that savings were guaranteed, when at the time they were not and to also imply that savers would lose their savings insurance benefits. The caller seems to have mised the point; savers would have to die first before the insurance becomes a benefit. Presumably savers with Mitchelstown were more concerned with staying alive than dying.

An unusual feature of the managers role appears to be its relationship with the board. The job as advertised says the manager will report to the treasurer. It appears to indicative of some credit unions continuing reluctance to move on from board dominance and embrace the modern practice where the majority of larger credit unions position their most senior executive as a general manager or CEO reporting to the board.

Signs of a A Growing Audience

Oh dear. Seems like the SINDO picked up on the Hong Kong jolly.
http://www.independent.ie/business/irish/adrift-on-a-hong-kong-junket-1457465.html

The fact is Brendan Logue was attending the Regulators Round Table whose members may have impressed him with their growing concerns over the future of the Irish credit union movement. No doubt he found some solace within his peer group. For sure Brendan may have been was able to share some juicy case studies with his colleague. A long way to travel to talk about problems every one knows of anyway.

What's even more telling is the size of the Irish delegation which reportedly even impressed the Chinese who wondered just what the population of Ireland was. Imagine almost the entire board of the ILCU travelled along with the usual large Irish delegation. One of the more unique contributions which brought a wry smile to the lips of many was when the ILCU delegate facilitated a discussion on leadership!

It could be that Irish delegates have reaffirmed their credit union credentials and are fresh and ready the next crisis, replete with their Hong Kong pins.