When the dust finally settles on credit union crisis two things may emerge. The first may be enforced reform and the second a split as the movement fragments into various constituencies.
Reform may be enforced by virtue of the state supporting credit unions through a guarantee or some form of NAMA solution for investment losses. And the state will be right to insist on reform.
Its sheer nonsense to continue to carry on the business using a model that is decades out of date. Credit unions whether the like it or no will be forced to adopt the savings and loans model where they will be funded through deposits and share accounts will represent a form of equity investment carrying higher potential returns paid from residual profits. They will also be required to get the business of savings and loans right – they will never be allowed to build large scale investment portfolios again and many will be required to unwind from their ludicrous high risk exposures they should never have built.
They will be required to shrink balance sheet size if they cannot lend. This means learning to operate on a slimmer budget and reduce costs in line. Already there is a move to reduce the cost of free LP/LS insurance coverage and some will shortly move to a hybrid free/member pay model.
Enforced mergers will become common place and may be facilitated through some form of government intervention. Left to ILCU or credit unions themselves consolidation will become a shambolic mess. Indeed I would argue that credit unions should look for a central agency tasked with consolidating the sector. There is only one sponsor with the power to ensure a proper approach and that is Government. It most certainly is not a trade body, ILCU or CUDA, operating through a self-directing stabilisation system no matter how well intentioned or for that matter regulated.
The nonsense of launching a universal banking account will have to take a back seat.
Credit unions cannot afford to increase costs any further and do not have the resources to support the investment and effort required to build a meaningful presence in the consumer current account/transactional market. In any event the marketing spend required to achieve even a 1% market share gain would bankrupt many operations.
Lending safely will be quite a challenge given the sub-prime pathology inherent within lending practices and the publics’ perception of credit unions being a clubby poor man’s bank. The current media advertising campaign is correct to position lending in the right market space but will need a hell of a lot of local intense marketing to make it pay. It’s failing to gain traction as the news is that new lending volumes are declining and not increasing.
In their short life time of only 50 years credit unions have never faced such dangerous times. The absence of a central body charged with ensuring financial stability and having the resources to do so is making matters far worse. Most directors will be unaware of the danger inherent in governments’ recent moves to legislate for private stabilisation – they may even believe it is a good thing. Far from it, private schemes have failed or been shut down everywhere else in favour of government agencies who have been largely successful in ensuring strong stable credit union movements. The real danger lurking in the long grass is that credit unions will be left to sort out their own problems which is something in the absence of leadership, competence and ability they will be unable to do. One senses that a hidden anti-credit union agenda hides behind political rhetoric. Memories of times when credit union reneged on a deal and nearly brought down a government remain strong.
The brave thing to do is to actively advocate for and insist on a government supported and empowered “credit union support agency” tasked with helping the movement trade through its crisis and facilitating consolidation onto a stable financial platform for the future.
How many credit unionist leaders would adopt such a position today? How many would be prepared to argue for reduced autonomy within a federalist system to achieve a sustainable future?
Welcome to Irish Credit Union Voices for the Future
Friday, 26 June 2009
Thursday, 18 June 2009
Is the son of ISIS in trouble?
The latest strategy in action emerging from Mount Street's mandarins reads like a poor assignment from a first year business student. ILCU has managed to convince its members during its annual town hall meeting to let it spend €4.5m of their money on yet another ill-conceived IT system development.
Firstly it’s important to understand it’s not what technology may do but what matters is the use it is put to. Studies have analysed how people use technology in ways not originally intended or at least not made explicit in the IT business case.
ILCU’s latest venture is a classic case study in wool pulling techno babble hiding the real strategy underneath Techie jargon. Feeding a rich diet of project governance, management and the meaningless phraseology beloved of IT people, it believes it can fool all of the people all of the time. But not it seems a growing body of credit unions that have once again sussed the real ILCU ambition and are withdrawing support and funding. Well done to all concerned for calling what is becoming ISIS mark 2.
The game is up. Sold as a benign, value add, secure data network over which data would stream and products and services are to be delivered the real intent behind the technology has been outed. ILCU want to own a gateway to credit unions, dominate and thus control providers assess to them and control product development. It’s a classic distribution control strategy where the gateway owner sets the terms and conditions for both credit unions and their service providers. Everyone would be locked into the ambitions and designs of ILCU.
Thing is a secure data network ain’t a bad idea if its owned, governed and managed by a reputable IT provider whose only objective is to provide, operate and manage the network. But ILCU hasn’t set its project up in this way and has no intention of losing control over its ownership and use.
Apart from gateway control ILCU has a more serious intent. By constructing a BIS or MIS ,what it calls Business Intelligence, it will build a central monitoring and control system. The question becomes why do this?
The answer is all too obvious when its in-system regulatory, stabilisation and central treasury ambitions are factored in. In short the League wants to become the corporate head office for credit unions that will be forced to cede autonomy becoming more like branches of a co-operative banking system.
Is this a bad thing? Maybe not. If the clear strategy and intent is for Irish credit unions to adopt a federalist model then a central corporate body will be needed. The problem is of course ILCU can never be that body at least not in its current form, structure and governance. It doesn’t have the organisational independence, competence or financial resources to deliver nor at this time has it the necessary legal framework within which to deliver. It probably thinks it does. Once the new Central Banking Commission gets wind of what it’s up to its gamble to spend millions of money it does not have on a system that only some will use will probably grind to a halt.
In fact one of the reasons why credit unions haven’t developed centralist co-operative supports is because of the existence of the ILCU as a body. It has a life of its own, a structure and system that is separate from and distant from credit unions. They may own ILCU, may vote on its direction and its permitted activities but it is an independent entity with it own purpose and ambitions. It’s why it always fails to deliver on big projects and will fail in this one too. It has no credibility with the credit unions that matter.
So far there’s no sign of the Financial Regulator who should have a legitimate oversight role in ensuring an important IT system is funded, developed, governed and managed by a competent recognised IT provider. Such is the importance of such systems that they pose significant systemic risks of their own right.
There’s many a slip between cup and lip and grandiose promises to deliver have fallen foul of ability to deliver. It seems that the latest plan is already running behind schedule and in danger of stalling.
Firstly it’s important to understand it’s not what technology may do but what matters is the use it is put to. Studies have analysed how people use technology in ways not originally intended or at least not made explicit in the IT business case.
ILCU’s latest venture is a classic case study in wool pulling techno babble hiding the real strategy underneath Techie jargon. Feeding a rich diet of project governance, management and the meaningless phraseology beloved of IT people, it believes it can fool all of the people all of the time. But not it seems a growing body of credit unions that have once again sussed the real ILCU ambition and are withdrawing support and funding. Well done to all concerned for calling what is becoming ISIS mark 2.
The game is up. Sold as a benign, value add, secure data network over which data would stream and products and services are to be delivered the real intent behind the technology has been outed. ILCU want to own a gateway to credit unions, dominate and thus control providers assess to them and control product development. It’s a classic distribution control strategy where the gateway owner sets the terms and conditions for both credit unions and their service providers. Everyone would be locked into the ambitions and designs of ILCU.
Thing is a secure data network ain’t a bad idea if its owned, governed and managed by a reputable IT provider whose only objective is to provide, operate and manage the network. But ILCU hasn’t set its project up in this way and has no intention of losing control over its ownership and use.
Apart from gateway control ILCU has a more serious intent. By constructing a BIS or MIS ,what it calls Business Intelligence, it will build a central monitoring and control system. The question becomes why do this?
The answer is all too obvious when its in-system regulatory, stabilisation and central treasury ambitions are factored in. In short the League wants to become the corporate head office for credit unions that will be forced to cede autonomy becoming more like branches of a co-operative banking system.
Is this a bad thing? Maybe not. If the clear strategy and intent is for Irish credit unions to adopt a federalist model then a central corporate body will be needed. The problem is of course ILCU can never be that body at least not in its current form, structure and governance. It doesn’t have the organisational independence, competence or financial resources to deliver nor at this time has it the necessary legal framework within which to deliver. It probably thinks it does. Once the new Central Banking Commission gets wind of what it’s up to its gamble to spend millions of money it does not have on a system that only some will use will probably grind to a halt.
In fact one of the reasons why credit unions haven’t developed centralist co-operative supports is because of the existence of the ILCU as a body. It has a life of its own, a structure and system that is separate from and distant from credit unions. They may own ILCU, may vote on its direction and its permitted activities but it is an independent entity with it own purpose and ambitions. It’s why it always fails to deliver on big projects and will fail in this one too. It has no credibility with the credit unions that matter.
So far there’s no sign of the Financial Regulator who should have a legitimate oversight role in ensuring an important IT system is funded, developed, governed and managed by a competent recognised IT provider. Such is the importance of such systems that they pose significant systemic risks of their own right.
There’s many a slip between cup and lip and grandiose promises to deliver have fallen foul of ability to deliver. It seems that the latest plan is already running behind schedule and in danger of stalling.
Rhetoric Rules the Roost in the Face of A Crisis
Debate on credit unions is frequently sidetracked by a rhetoric that demonstrates a serious lack of thought or fact based discussion. The overwhelming majority of credit unionists have few financial qualifications and their only experience is the small works of their local credit union. Their view is formed through constant repetition of doing things as they have been done for the past 50 years. Credit unionists and their human systems have become skilled at incompetence. This is not to criticise, merely to state a position. It explains why since inception not one major core product or service development has been successfully executed. The products and services offered remain the same as they were 50 years ago. No innovation and no change – why?
The Irish governments new DGS laws illustrate that few if any credit union directors, managers are aware of what deposit insurance is and what its objectives are. If they were they would have objected to the states inclusion of credit unions in the banks scheme and would have insisted on a properly designed credit union system as found in the US and Canada. But that opportunity has been lost as the ILCU fought and lost in its demand for a private scheme, it did not have the competence of resources to manage. In terms of what is called the financial safety net, Ireland has the most ineffective system in the developed world. It is wholly inadequate and one of the reasons why the sector is in crisis.
Credit unions are a unique form of banking. This is crucial to understanding what their business is and how the Irish model has become an aberration and why it is now bust. There are three distinct models for credit unions, found across the world, depending on the maturity of the sector. The first is a finance company funded through shares, leveraged off deposits where “interest” is a return on a share in profits. The second is a savings and loans specialist, funded by deposits with a broad line of savings and loan products, tracking the market on rates and the third a full service co-operative banking service offering savings, transaction accounts, small business services, mortgages, credit cards, life insurance, investments and so on.
The Irish model has been stuck in the finance model for the past twenty years and is at the root of why credit unions cannot pay a dividend this year and why over 100 will fail within two years. Some are trying to make the shift to savings and loans but cannot do so on their own – they are missing the central resources found elsewhere.
Stuck with the finance model, they haven’t been making enough loans for over ten years. As costs have escalated margins have shrunk and the core business of savings and loans is loss making. Some have no chance to reverse this trend and have become what the regulator and others call savings clubs. Income is entirely interest income – fee income from the few additional services provided is less that 1% of total income. Contrast this with a movement that did change, Australian credit unions are full service with interest income comprising 70% and fee income 30%.
The reason why this has happened is in credit unionist thinking and response to their customers. Because the emphasis is in on shares and maximising the return to shareholder (dividend) credit unions have been managed to maximise profits to finance high dividend payments. Had credit unions competed close to market rates in the past ten years they would have retained an additional €300m in reserves which should have been invested in improving products, services and expanding lending activity. But they didn’t. Instead they remained fixated on share balances and were sucked into what became an investment bubble, that when it burst lost €500m. In short the ill-advised strategy promoted by the ILCU cost the movement close onto €800m in foregone financial reserves without adding the money written off on IT projects etc.
So why didn’t credit unions away from the finance model to savings and loans specialist or full service co-operatives. The answer lies in the insistence on retaining independent autonomy and innate inability to co-operate. The paradox is Irish credit unions have not learned how to co-operate with each other.
Yet they have a marvellous opportunity to rebuild their business and begin lending again – thing is they will not be able to do this on their own and need help badly. There is only one sponsor with the pockets and power to insist on change and that is government – but what are the chances of it moving from its position where it considers credit unions less than systemically important and is maintaining the most ineffective financial safety net in the modern world.
The Irish governments new DGS laws illustrate that few if any credit union directors, managers are aware of what deposit insurance is and what its objectives are. If they were they would have objected to the states inclusion of credit unions in the banks scheme and would have insisted on a properly designed credit union system as found in the US and Canada. But that opportunity has been lost as the ILCU fought and lost in its demand for a private scheme, it did not have the competence of resources to manage. In terms of what is called the financial safety net, Ireland has the most ineffective system in the developed world. It is wholly inadequate and one of the reasons why the sector is in crisis.
Credit unions are a unique form of banking. This is crucial to understanding what their business is and how the Irish model has become an aberration and why it is now bust. There are three distinct models for credit unions, found across the world, depending on the maturity of the sector. The first is a finance company funded through shares, leveraged off deposits where “interest” is a return on a share in profits. The second is a savings and loans specialist, funded by deposits with a broad line of savings and loan products, tracking the market on rates and the third a full service co-operative banking service offering savings, transaction accounts, small business services, mortgages, credit cards, life insurance, investments and so on.
The Irish model has been stuck in the finance model for the past twenty years and is at the root of why credit unions cannot pay a dividend this year and why over 100 will fail within two years. Some are trying to make the shift to savings and loans but cannot do so on their own – they are missing the central resources found elsewhere.
Stuck with the finance model, they haven’t been making enough loans for over ten years. As costs have escalated margins have shrunk and the core business of savings and loans is loss making. Some have no chance to reverse this trend and have become what the regulator and others call savings clubs. Income is entirely interest income – fee income from the few additional services provided is less that 1% of total income. Contrast this with a movement that did change, Australian credit unions are full service with interest income comprising 70% and fee income 30%.
The reason why this has happened is in credit unionist thinking and response to their customers. Because the emphasis is in on shares and maximising the return to shareholder (dividend) credit unions have been managed to maximise profits to finance high dividend payments. Had credit unions competed close to market rates in the past ten years they would have retained an additional €300m in reserves which should have been invested in improving products, services and expanding lending activity. But they didn’t. Instead they remained fixated on share balances and were sucked into what became an investment bubble, that when it burst lost €500m. In short the ill-advised strategy promoted by the ILCU cost the movement close onto €800m in foregone financial reserves without adding the money written off on IT projects etc.
So why didn’t credit unions away from the finance model to savings and loans specialist or full service co-operatives. The answer lies in the insistence on retaining independent autonomy and innate inability to co-operate. The paradox is Irish credit unions have not learned how to co-operate with each other.
Yet they have a marvellous opportunity to rebuild their business and begin lending again – thing is they will not be able to do this on their own and need help badly. There is only one sponsor with the pockets and power to insist on change and that is government – but what are the chances of it moving from its position where it considers credit unions less than systemically important and is maintaining the most ineffective financial safety net in the modern world.
Thursday, 4 June 2009
Irish Credit Union Crisis to reach a Crescendo this Year
With now over 200 loss making operations, Ireland's network of independent stand alone mini-banks will almost certainly face a major run on savings later this year.
Once savers figure out their credit union can’t pay a dividend and will be unlikely to be able to pay next year as well, they will move in droves to high street government guaranteed banks.
Why can’t credit unions pay a dividend?
The straight forward answer is the business model, as practiced in Ireland, hasn’t been working that well for a while. Credit unions have not been making enough loans. They should have been lending more and investing less over the past ten years.
Their main source of income should be interest paid on loans supplemented by fee income from sales of other products and services with a contribution from money invested in liquid investment assets. Seriously underlent, lower margin investments account for at least 50% of income earning assets. Far too much is tied up in illiquid instruments that are also significantly loss making.
Irish credit unions are at best 50% lent and many are operating at far lower levels. This means that in almost all cases loan interest income does not cover the costs of running their savings and loans operations. The problem is that credit unions cannot now increase lending. The scale of the economic recession and increase in consumer credit risk makes safe lending far more difficult. To make matters worse because credit unions have money tied up in illiquid investments they haven’t the free money to lend.
On top of this people are taking their money out chasing higher high street rates. At the same time loan repayments are rapidly declining as people default on loan repayments. Cash flow or money to fund withdrawals and new loans is very tight. So tight, that the regulator has instructed a large number of credit unions to restrict new loans to percentage of monthly net cash flow (loan repayments + new deposits).
The cash flow scenario is ripe for a liquidity collapse forcing the closure of a large number of credit unions.
Some are borrowing from others to support liquidity shortfalls but inter-credit union lending is fraught with default risks few will have the financial competence to assess or understand.
It is even said that some have engaged in cross-border transactions to massage liquidity positions in advance of making regulatory returns.
Investment and loan losses, which will plunge many into the red, can only be financed from already thin capital reserves. Just how many are exposed to insolvency risk or will have seriously impaired solvency levels is unknown. For sure many will be unable to increase lending volumes off their deficient reserve levels.
Once savers figure out their credit union can’t pay a dividend and will be unlikely to be able to pay next year as well, they will move in droves to high street government guaranteed banks.
Why can’t credit unions pay a dividend?
The straight forward answer is the business model, as practiced in Ireland, hasn’t been working that well for a while. Credit unions have not been making enough loans. They should have been lending more and investing less over the past ten years.
Their main source of income should be interest paid on loans supplemented by fee income from sales of other products and services with a contribution from money invested in liquid investment assets. Seriously underlent, lower margin investments account for at least 50% of income earning assets. Far too much is tied up in illiquid instruments that are also significantly loss making.
Irish credit unions are at best 50% lent and many are operating at far lower levels. This means that in almost all cases loan interest income does not cover the costs of running their savings and loans operations. The problem is that credit unions cannot now increase lending. The scale of the economic recession and increase in consumer credit risk makes safe lending far more difficult. To make matters worse because credit unions have money tied up in illiquid investments they haven’t the free money to lend.
On top of this people are taking their money out chasing higher high street rates. At the same time loan repayments are rapidly declining as people default on loan repayments. Cash flow or money to fund withdrawals and new loans is very tight. So tight, that the regulator has instructed a large number of credit unions to restrict new loans to percentage of monthly net cash flow (loan repayments + new deposits).
The cash flow scenario is ripe for a liquidity collapse forcing the closure of a large number of credit unions.
Some are borrowing from others to support liquidity shortfalls but inter-credit union lending is fraught with default risks few will have the financial competence to assess or understand.
It is even said that some have engaged in cross-border transactions to massage liquidity positions in advance of making regulatory returns.
Investment and loan losses, which will plunge many into the red, can only be financed from already thin capital reserves. Just how many are exposed to insolvency risk or will have seriously impaired solvency levels is unknown. For sure many will be unable to increase lending volumes off their deficient reserve levels.
Plans by the regulator to regulate capital adequacy through a 10% "statutory reserve to total assets ratio" are meeting with trade body resistance that appears to taking on a political dimension. The question is will the Irish Finance Minister prevail upon the regulator to forebear as has happened in the past? Or will the Minister and his officials back up the Regulator? Irish government officials have a reputation for not being entirely supportive of the credit union regulator in the past which has led to enforced forebearance particularly withy investments. Had the regulator's requirement to restrict investments been agreed to in 2004/05, tens of millions would not have been lost last year.
So where does this leave credit unions?
One can predict a series of high profile loss making credit unions causing a collapse in trust and confidence in all credit unions. This would result in a run with many forced to close their doors as they run out of cash to fund withdrawals. In this scenario no credit union will be safe and no matter how financially robust all will suffer. This could happen either this year or next year.
Sticky plaster solutions will be applied – credit unions may be allowed to raid the family silver to pay dividends – but dipping into reserves has to be paid for next year and the year after.
There may also be an “investment loss” support scheme – where government guarantees are provided to allow credit unions use impaired assets as security for emergency liquidity lines. But again this will have to be paid for and losses financed over time.
Whether the outcome is a "Big Bang" run on savings or a credit union bail out process the net effect is the same. Credit union balance sheets are seriously damaged and can only be repaired from lending income. And credit unions are very poor at lending especially in a high risk economic environment.
The upshot is a period of self-enforced mergers as weaker credit unions vote to amalgamate with stronger neighbours – where there is one. Others may well opt to close. In a few short years numbers will dramatically decline – probably by more than half.
Left to chance, shrinking the sector to a financially stable size will be a chaotic shambles unless that is Government intervenes and forces change to the way Irish credit unions are structured, governed and managed. Such intervention may well be the price of providing state support.
Inevitable, avoidable and preventable the Irish credit union crisis will cause many to take stock of safety and soundness of the credit union business model. Before they do they need to understand what went wrong in Ireland and how a generation of directors and their trade body failed to modernise and allowed credit unions become dysfunctional investment managers. It is a story of poor governance, leadership and management. It is also a story of political capitivity which enforced regulatory forebearance.
Tuesday, 2 June 2009
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?
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?
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