Half of all Irish Credit Unions running at a loss

The heat is on. One in two credit unions are running at a loss and will be unable to pay a dividend this year and will struggle to pay one next year as well. From the smallest to the largest, boards are fretting over how to deal with the bad news they will deliver later this year.

Doubtless none are telling their members now that they will not be paid a dividend which raises a quite serious ethical dilemma for any credit union board – does it tell now or wait for the AGM.

According to the ILCU it’s ok for credit unions not to pay interest (dividend) to savers. It says interest was low anyway as people only have on average €4000 on deposit. What a load of tosh – the average includes dormant, inactive, low balance accounts, penny savings accounts and a host of tiny balances no one even remembers they have.

Then again it has also said it wants to see attachment orders usable by credit unions chasing loan arrears. And what’s more it also wants credit unions to be able to grab people’s non-home assets as security for their debts.

Despite major media stories highlighting that half of all credit unions are running at a loss and despite regulatory admission of over a hundred loss making unions for the first quarter (Oct-Dec 08) the ILCU says:

“The most up to date prudential returns do not support the view put forward in the Independent story.”

And it wants credit unions to say this to their customers. What they should be telling their customers is whether or not they will be able to pay a dividend this year. All ILCU is saying is the prudential returns do not support the story – but credit union management accounts would if published

Quoted in the Irish Independent, League CEO Brennan said "Losses will not be reported by half of credit unions or anything near that” Now according to regulatory statements over 100 were operating at a loss and unlikely to recover before the year end. So the figure must be between this and the Independents half of 405 (there are more than 405 but no ones telling the others at this time!)

Strangely it seems ILCU petitioned the Minister for Finance to undertake a “risk review” – another version has the Ministers asking the League to do a review. Has the Minister asked the Regulator and if not why not?

So what does “or anything near that” mean – is it half of half of all credit unions which is closer to the regulators opinion or is it between “half of” and “half of half of” ? It’s time methinks for ILCU to come clean on what it knows instead of playing word games that mean absolutely nothing.

Faced with the one of the largest crisis of any credit union movement the leading trade body is in denial. What’s worse it’s about to true to act as a prudential supervisor by introducing and supervising its own “capital policy”.

More like a bad cut and paste job it proposes risk based capital allocation based on a credit unions risk profile. What absolute utter tosh! Nowhere has any regulatory authority successfully linked capital adequacy to credit institution risk profiling based on global performance scores such as Pearls or Camel. (Risk profiling is sometimes used to price risk premiums for deposit insurance and where the agency is a state body.)

To make matters worse the majority of credit unions actually voted for it without even understanding what it means or represents. It matters little as the League hasn’t the competence to make it work – what’s more it cannot enforce the standard – not unless that is it is also the only mandatory stabilisation provider which is where the real action is. So let’s call a spade a spade shall we.

1. 200+ credit unions will be loss making this year
2. Losses will have to be written off against reserves
3. They will not be able to use reserves to pay a dividend
4. If they do, then reserves will be seriously impacted
5. What happens next year?

What’s wrong with the regulators regulatory reserve ratio?
10% is all -
It’s simple to understand and operate
It is in line with international practice for small unsophisticated credit co-operatives
10% may be too high or too low!

What’s right about ILCU’s version?
It’s complex & badly thought through
It’s a cut and paste without the intellectual rigor or empirical evidence to back it up
Pearls Ratios do not capture risk in its entirety
It’s right if what you want is to become a central governing corporate entity
It fits with the IT strategy which is all about a central MIS to judge risk and performance
It fits if you also provide stabilisation and can charge risk based premiums
Has ILCU explained what it’s really after?
Will be allowed to fulfil its ambition
Should it be allowed?