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The effect of the credit crunch on credit unions.

  • 24-07-2021 3:16pm
    #1
    Registered Users Posts: 3,516 ✭✭✭ political analyst


    I'm aware that credit unions were, to say the least, not unscathed by the credit crunch, the financial crisis that led to the government's guarantee to banks in 2008. Given that banks are for-profit organisations, reckless lending by them is not surprising. However, credit unions are private limited companies and also not-for-profit because they must be run for the benefit of members of the credit unions. Therefore, one would assume that credit unions had a much smaller incentive to have a generous lending policy. So how did credit unions get caught-up in the crisis?



Comments

  • Registered Users Posts: 3,466 ✭✭✭ dotsman


    Lots of reasons, but the main one being one of the core purposes of Credit unions is to lend to people that banks won't lend to.

    Think about that for a second.

    What do you think the risk profile was of the typical person borrowing from a Credit Union in 2006? Or, in other words, what do you think the risk profile was of the typical person who couldn't borrow from a bank in 2006?

    Likewise, although they are not-for-profit, they still can't be run "at a loss". To be able to offer high returns to savers, they need to lend in large amounts and to high-risk (high margin) borrowers.

    There are other considerations as well. While credit unions used to lower their risk profile by only doing small, short term loans, by 2006, they were offering large, long-term loans and even mortgages etc. In other cases, some credit unions were so awash with money, they start buying bonds etc in banks ("burn the bondholders!").

    Hell, the criminal gang known as "Davy" (now known as "Bank of Ireland Davy"), sold €183 million in bonds in very dodgy circumstances to 140 individual credit unions back in 2005 that resulted in massive losses.



  • Registered Users Posts: 3,516 ✭✭✭ political analyst


    Fair play to you.


    Indeed, it creates a massive hole in the argument put forward by those activists who claimed that bondholders should be burned.



  • Registered Users Posts: 3,466 ✭✭✭ dotsman


    The "burn the bondholders" was always a crazy notion.

    Firstly, some people seem to think they are held by these billionaire monopoly characters. In truth, bonds are typically held by pension and life funds etc. If you burn the "bondholders", a couple of weeks later, a tonne of people get a letter from their pension administrator that the fund is bust and they are going to retire (or spend the rest of their retirement if already retired) in poverty.

    Secondly, "burning the bondholders" is basically "not repaying your debts". However, Ireland needed to continue to borrow a whole load of money to dig itself out of the crisis and continues to borrow its way through this current crisis. You don't announce you are "have no intention of paying your debts" before you borrow the money. It there ever came a time when we could confidently say we will never need to borrow money again (or at least for a few decades), then maybe you could do it. But saying you are going to do it before you've even borrowed the money is the definition of stupidity.



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