A Bad Year gets Worse as Credit Unions fail to pay dividends

The penny is begging to drop. 2008 was a bad year for the credit union movement. 2009 will be worse.

At least credit union savers are now protected up to €100,000. But this won’t stop them taking their money out of financially damaged credit unions. If credit union leaders believe for one minute that Government will ride to their rescue, they better think again.

Over 20 credit unions ended 2008 unable to pay a dividend and many more have suspended deposit interest payouts. This is unprecedented. If it happened to a bank, the regulator would move in to close it down. People who trusted their credit union with their savings have been badly left down.

Fearing a run on credit unions, the Financial Regulator has asked ILCU & CUDA to set up an emergency liquidity fund. Credit unions have no central treasury operations that could act as lender of last resort. The Regulator has suggested the League makes its SPS fund available. It was all too predictable.

Why? Investments in products credit unions should never have invested in have collapsed in value. Falling values of perpetual bonds, high risk unlisted shares, equities, marketable securities and retail investment products have all added to the credit union tale of woes. ILCU’s own collective fund the CMTF is showing losses of 12% as floating rate notes fall in value.

Dodgy loans were hidden for years by credit unions bad lending practices. Borrowers were allowed to leverage up their loans without repaying capital. The credit union loan behaved as credit card debt with ever increasing top ups and only minimum payments to clear interest and some capital. Then to manage arrears credit unions manipulated their loan books. Rolling over bad loans into new ones hid the problem. Worse still, poorly protected IT systems were abused. Credit unions would lodge €1.00 to a delinquent loan account forcing it out its delinquent category. They did so knowing that this would prevent the loan having to be provided for.

Add to this heady mixes of losses are loans given to migrant workers. Tens of thousands have headed home leaving their debts behind them. Many credit unions are nursing loans they will have no option but to write off in full next year.

The net effect is hundreds of millions in investment losses and loan write offs have been or will have to be written off. The regulator has warned of these risks for years.

The ILCU will be seriously challenged to respond with its SPS fund. It is likely the fund has also been invested in loss incurring assets. At one time it admitted to having a 10% exposure to perpetual bonds.

Meanwhile new audit practice notes issued this month provide robust guidance to credit union auditors. It’s quite clear that many who currently audit credit unions may think deeply about a continuing involvement given the onerous duties required of an auditor.