ILCU SPS Rhetoric To Come Unstuck in 2009

The Irish League of Credit Unions needs to face reality. In proclaiming credit unions safer than banks and implying it can always prevent a credit union failing, it risks being hoist on its own pétard. A sovereign state may well prevent failures but surely not an unincorporated trade association, operating an unregulated informal bail out fund. Yet ILCU claims its savings protection scheme most recent bail out was similar to the British Government’s bail out of Northern Rock. As many of its members are struggling in the wake of global and domestic crisis, its resolve may be sorely tested.

A gaping hole in the credit union financial safety net was closed last September when Government fearing a general run on deposits increased the deposit guarantee limit to €100,000 and included credit union savers under its Deposit Protection Scheme. However there’s a catch as Government says the guarantee is a “backstop” to an approved credit union SPS, ambiguously juxtaposing “Deposit Protection” with “savings protection” continuing it seems to accommodate trade body self-interest to the detriment of the public good.

Backstop, means the financial safety net remains incomplete and missing two critical “stabilisation” elements without which governments savers guarantee is a damp squib. The missing elements are a system to provide emergency liquidity and a system to inject temporary or long term capital. Both can be a function of an integrated deposit insurance system such as that designed in the O’Toole Bill or can sit in an independent regulated stabilisation entity complimenting a deposit guarantee scheme. The US uses an integrated system and Canada the complimentary model.

Standing in the gap is ILCU with its tiny unregulated bail out fund of €110m, it claims is sufficient to support 525 credit unions, having €15.5bn in assets and operating in two differing legal and regulatory jurisdictions. Worryingly its fund may still be heavily invested in high risk assets, including equities, debt instruments, and unit funds. As these asset classes tanked last year, ILCU would be very lucky indeed not to have lost money. If it has lost money, then its ability to deliver is highly questionable. ILCU “Group” accounts which are audited by PWC will be eagerly awaited this year.

To make matters more intriguing both ILCU affiliation fees and contributions to its fund are charged by many credit unions to their customers savings accounts without their written permission. It’s a practice no doubt consumer bodies will have something to say about. In all ILCU has been paid over €19m in SPS contributions and over €17m in affiliation fees since 2003.

ILCU remains rooted in credit unionist rhetoric, resonant of another form of unionism that at one time cried “no surrender”. Time will tell if it alone can prevent credit unions from failing or if it has been hoist on its own petard.