Credit union boss in attack on banks

ILCU President Adairs’ pugilistic commentary reported in today’s Sunday Tribune generated a headline “Credit union boss attack on banks”. Chucking stones around your own glasshouse springs to mind.

Like other bombastic proclamations of "credit unions are safer than banks", Adairs’ reported comments miss the mark by a mile and then some.

Just like banks, credit unions are "credit institutions"; defined as taking money on deposit from the public and making loans off their own balance sheet. The fact is credit unions are banks – co-operative banking operations having a differing ownership structure to joint stock banks.

The Government €400bn guarantee was not extended to credit unions as they are too small to matter. It has absolutely nothing to do with “credit unions not wanting to be associated with bankers” as Adair would have people believe. In reality if the government extended its guarantee to cover credit unions the resultant cost and impact of regulatory scrutiny would cause severe problems both for the ILCU and many credit unions.

"We do not give out mortgages so we are not exposed" says Adair.The dogs in the street know of credit union lending to people in buying their homes. In the banks case mortgages are secured unlike the mountain of unsecured credit union property related debt. Credit unions do not have a clean pair of hands, they willingly and knowingly participated in fuelling the property bubble and are exposed to the consequences of its explosion.

He is right in saying credit unions "do not get funding from the international money markets". However it is credit union assets and not their liabilities which are hugely exposed to international money and equity markets. For example Perpetual bond, ISTC and CTT losses amounting to over €125m.

Adair makes no mention the fact that credit union deposits with Irish banks are now fully guaranteed by the Government. So if a guaranteed bank fails, credit unions are fully protected. If, as Adair says "credit unions don’t want to be associated with banks" then surely they should put their funds on deposit with non-government guaranteed deposit takers, close their bank current accounts and cease using the banks money transmission system.

Once again the SPS €110m (now called a stabilisation fund) is touted as part of savers "triple protection". It may have been in normal times but is hardly the case today.

Adair says credit unions “have to hold reserves of 10%”. Many credit unionists will be scratching their heads wondering where it says they “have to hold 10% in reserves” when all the *law requires is a 10% pre dividend allocation from whatever surplus is generated.

Talk is cheap and paper never refuses ink but eating humble pie is something altogether different. The ILCU may end up eating its words if the government or its guaranteed banks are ever called on to bail out credit unions.


http://www.tribune.ie/business/news/article/2008/oct/05/credit-union-boss-in-attack-on-banks/

*45.—(1) A credit union shall establish a reserve (to be known as its ‘‘statutory reserve’’) by allocating in respect of each financial year not less than ten per cent. of the surplus funds of the credit unionfor that purpose.

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.