ILCU Killarney Pageant will Fail to Inspire

This weekend credit union people from all over Ireland will gather in Killarney for the annual ILCU pageant. This year two major issues are to be dealt with, that frankly are a sheer waste of time and effort.

The first is the Deloitte “independent” report on ILCU’s role in promoting investments that have lost so much money. It reads as somewhat of a whitewash but is critical of a lack of duty of care to credit unions in not keeping an eye on the products being sold under its scheme. In the main the synopsis of a report that has only been given to Enfield Credit Union has issued a soft slap on the wrists and tells the ILCU to be more careful in future. This leaves it free to continue to develop its central treasury service. With tens of millions wiped off credit union balance sheets a collective feeling of guilt will probably prevent them from holding their trade body to account.

The report of course once again highlights the enormous gap in the movement’s financial structures. There should be a central liquidity manager with whom credit unions must pool liquidity. In Australia credit union owners of CUSCAL place excess liquidity and access a range of capital and liquidity supports including access to the money markets and loan securitisation programmes. The same is true of Canadian central credit unions that have for decades been plugged into money markets and money transmission system. US credit unions have well developed system of not only central credit unions but a central credit union for central credit unions – they would given the continental size of the marketplace.

In many respects the Deloitte report is a “so what”. What matters is what happens next and for sure the ILCU can no longer be trusted as a central treasury manager no matter what it says it will no do. It will take a new manager, established under legislation, supervised by the credit union regulator as a credit union entity, before a satisfactory solution has been achieved.

The second waste of time is the so called capital adequacy policy published this week. Where does the ILCU get off thinking it has a role in defining regulatory prudential standards for credit unions? Introducing risk weighted approach and rating system for credit unions is fraught with problems. The ILCU does not explain how it has arrived at risk weightings, limits or for that matter why a credit union with a higher level of regulatory capital is safer than one with a lower level – what constitutes the right safe level and why has not been explained. In fact the policy is a poor version of complicated models that seek to charge premiums for risky credit unions in pricing the cost of deposit insurance – thus limiting moral hazard risks. But the ILCU is quite on this aspect of its model – just how it proposes to force a credit union to achieve a higher rating is not stated. But it can be implied through what the ILCU is also up to. Firstly it wants to retain its stabilisation role – probably hoping its system will be approved which unlocks pricing and supervision of what it sees as its right to set and maintain prudential type standards. Being able to financially penalise or charge a risk premium for a poorer rated credit union provides leverage to force it to behave itself. But risk based premium pricing, allied to risk weighted capital adequacy and use of other ratios such as PEARLS or CAMEL is fraught with complexity and very difficult to implement even by the most professional of regulators. Just why the ILCU believes it has the competence to develop such a system and make it work is an obvious question to be answered. Which brings up its IT data base project – the only reason to have a central MIS of the nature proposed is so that you can monitor and control. It appears the ILCU has yet to put forward a cogent rational explanation demonstrating the business benefits of its project which is clouded in project management speak.

Finance officials have slipped out draft stabilisation legalisation which amounts to a cack-handed cock up. It allows for more than one scheme and the regulator is to set conditions for approval etc. Instead of designing a proper stabilisation system and specifying its legal form, governance and funding arrangements, Finance has left this to “groups of credit unions” and the regulator. Once again permanent government has dropped the ball. (more on this later !)

At almost the same time RCU announced a Regulatory Reserve Ratio of 10% to Total Assets. The typical current profile is 11.5% total reserves to total assets of which 8% is statutory and 3% other type of reserves. The banking equivalents are statutory = Core Tier 1 and other reserves = hybrid non-core Tier 1/Tier 2. From Sept next they will have to provide for 10% of Total Assets (net of bad debt balance sheet provisions) in statutory capital (similar to core tier 1 equity). The ratio is not calculated on a risk weighted basis and other reserves will not qualify as they are distributable and or restricted a bit like Tier 2. As most if not all credit unions are below the 10% (average is c8%) they will have to switch funds to statutory reserves. But many will be short and will have to fund from annual surpluses – where they generate them. The RCU is cutting slack and allowing those who fall short to reach the target 10% by Sept 2011 (2 years) as follows : 8% by 09/09, 9% by 09/10 and 10% by 09/11. This group of credit unions may have their business activities restricted. He does not mention what happens if a credit union has less than 8% by September next.

The RCU is not using a risk weighted asset (RWA) approach as the ratio will apply to total assets without adjusting for risk. International equivalents require 8% on RWA which is c10-11% on non RWA basis. Australian CU’s are operating at 15-21% RWA and c12-14% non RWA basis. Similar levels are found in the US – unadjusted for a counter cyclical capital.

The move is in direct conflict with the ILCU capital policy. Just who is the regulator ? In the space of a month the ILCU has published a capital policy (prudential regulation) and a minimum competence regime (prudential supervision) while the Regulator has produced a Regulatory Reserve policy together with a fitness and probity impact analysis ...are we seeing the hidden conflict between a trade body and regulator begin to spill over ?

Ireland needs a vibrant viable alternative to main street banking. It is high time that influential credit union leaders, both directors and managers took the initiative and demand that Government acts. ILCU rhetoric won’t put a single cent into credit union reserves or cash balances. Any credit union can be allowed to fail, none are that important not to. But the sector is of systemic importance and cannot be allowed to spiral into a chaos. There should be a credit union commission to tackle the crisis and reform the sector. Government should establish a commission, get the right people on board and let them get on with it.