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Credit Union time bomb ticking to zero hour?

  • 24-11-2010 11:30am
    #1
    moorefield
    Closed Accounts Posts: 31 ✭


    Results from Newbridge Credit Union illustrate the damage wrought by years of reckless lending.

    Hidden behind banking losses are some quite significant losses emerging from credit unions. The problem is financial performance is hidden behind non-transparent accounts and annual general meetings carefully stage managed to deflect any criticism of directors and management.

    Yet there are many cases emerging where credit unions were used as private banks by a small numbers of unfluential people who managed to extract large loans to invest in speculative business ventures.

    Their ordinary borrowers and savers are paying for years of reckless lending as many have been told to stop lending and savers dividends collapse.


Comments

  • #2
    [Deleted User]
    Posts: 23,339 ✭✭✭✭ [Deleted User]


    moorefield wrote: »
    and savers dividends collapse.

    Dividends from CUs are p1ss poor anyway.


  • #3
    Test For Echo
    Registered Users Posts: 1,223 ✭✭✭Test For Echo


    RoverJames wrote: »
    Dividends from CUs are p1ss poor anyway.

    Thinking of moving a good portion of my savings out of my CU - haven't got a dividend from them in the last few years.


  • #4
    Liam Byrne
    Closed Accounts Posts: 18,163 ✭✭✭✭Liam Byrne


    RoverJames wrote: »
    Dividends from CUs are p1ss poor anyway.

    As distinct from what ? The slightly higher percentage that you get from banks but have to pay 10 times that to keep them afloat ?

    A Credit Union dividend of 1% is far, far better than the apparent 3% offered by Anglo and the other cesspits, because you've already given Anglo something around €20,000 in order to allow it give you the 3%

    So if you had €20,000 in Anglo then it'd take them 34 years before you'd be getting the actual 1% that the Credit Union gave you in the first year!

    Can't think of the figures for Bank of Ireland & AIB at the moment, but you're definitely looking at them taking from you for the first 3 or 4 years at least, before you start making interest.


  • #5
    P. Breathnach
    Registered Users, Registered Users 2 Posts: 12,089 ✭✭✭✭P. Breathnach


    It should be borne in mind that credit unions are separate institutions, albeit the overwhelming majority of them have links through the Irish League of Credit Unions which, among other things, has a reserve fund to assist CUs in difficulty.

    It is sometimes claimed that the ILCU reserve is not sufficient to meet all the potential problems, but I don't know if that is provable; it might be scaremongering.

    I have just received the annual accounts of my CU, and gone through them. I am fully satisfied that if it closed its doors in the morning I would get at least 90% of my savings back, probably get 100%, and there is even a chance of a small surplus. I get a small dividend (1.5%) and I also derive some satisfaction from the feeling that I am participating in a community venture -- there is more to life than money.


  • #6
    [Deleted User]
    Posts: 23,339 ✭✭✭✭ [Deleted User]


    Liam Byrne wrote: »
    As distinct from what ? The slightly higher percentage that you get from banks but have to pay 10 times that to keep them afloat ?

    A Credit Union dividend of 1% is far, far better than the apparent 3% offered by Anglo and the other cesspits, because you've already given Anglo something around €20,000 in order to allow it give you the 3%

    So if you had €20,000 in Anglo then it'd take them 34 years before you'd be getting the actual 1% that the Credit Union gave you in the first year!

    Can't think of the figures for Bank of Ireland & AIB at the moment, but you're definitely looking at them taking from you for the first 3 or 4 years at least, before you start making interest.

    When your money is in the CU you have still given anglo something like €20,000 though so you may as well take the 3% ;)


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  • #7
    moorefield
    Closed Accounts Posts: 31 ✭moorefield


    @p breathnach
    ILCU has a fund which it may use of only €125m of which €45m is already committed to about 15 credit unions. There are 419 of which c404 are members of ILCU along with another 110 in the North. Collective assets are c€12bn for ILCU credit unions - so it has a paltry €85m left to support 399 credit unions and unknown number of which will get into trouble.

    In viewing your credit union accounts you would need to adust them on a gone concern basis before concluding you would get all your money back -in any event €100,000 is covered under the deposit guarantee scheme.

    I agree that leaving money on deposit is a good thing to do but only if the credit union is doing what its supposed to do - make good loans prudently. many haven't and some have been treated as private banks. For me the good ones should take over the bad ones and run them better. And they must get away from relying on dividends from proifts - what's wrong with paying an interest rate? This way they can learn how to operate as modern credit unions everywhere else.


  • #8
    P. Breathnach
    Registered Users, Registered Users 2 Posts: 12,089 ✭✭✭✭P. Breathnach


    moorefield wrote: »
    @p breathnach
    ILCU has a fund which it may use of only €125m of which €45m is already committed to about 15 credit unions. There are 419 of which c404 are members of ILCU along with another 110 in the North. Collective assets are c€12bn for ILCU credit unions - so it has a paltry €85m left to support 399 credit unions and unknown number of which will get into trouble.

    Let's not be unduly alarmist. Credit Unions also have their own reserves, which can be quite substantial; they should also make a proper provision for bad debts. I know my local CU, and I know most of the people involved in its governance. That's a plus, because I know what sort of people they are, and I trust their integrity and their competence. That is very much in keeping with the intention of the common bond, and I would not like to see any CU grow so large that the community spirit underpinning them loses meaning. [Too small is also undesirable.]
    In viewing your credit union accounts you would need to adust them on a gone concern basis before concluding you would get all your money back -in any event €100,000 is covered under the deposit guarantee scheme.

    I do know how to read financial statements. My CU is healthy.
    I agree that leaving money on deposit is a good thing to do but only if the credit union is doing what its supposed to do - make good loans prudently.

    No disagreement there.
    many haven't and some have been treated as private banks.

    I hear of such things, but I am not aware of any measurement of the problem. We tend to hear about weaknesses in the governance of CUs only when they actually break.
    For me the good ones should take over the bad ones and run them better.

    I have my doubts about that: to me, the common bond is very important. If one CU attempted to serve say, four towns covering half a county, the local identification with one's CU would be diluted, It could end up that the bad take over the good and run them worse.
    And they must get away from relying on dividends from proifts - what's wrong with paying an interest rate? This way they can learn how to operate as modern credit unions everywhere else.

    If the profits do not belong to members, then to whom do they belong? The TSB was privatised; most of the building societies were converted into vehicles for profit rather than for mutual support. No thanks: I want my community organisation.


  • #9
    moorefield
    Closed Accounts Posts: 31 ✭moorefield


    Is the Central Bank being alarmist?

    “The current credit union operational model is coming under increasing stress. It must be recognised that not all credit unions will make it through this difficult financial and economic environment in their current structure. We must prepare for this. We expect that the economic downturn will continue to expose those credit unions that do not have the financial strength to weather the current difficulties – either because of insufficient reserves or because of poor management and business decision making.

    The subject of ‘restructuring’ within the credit union sector must now be put firmly on the table for open and considered discussion. Indeed it is encouraging to note that on your own agenda for today’s conference the subject of “rationalisation” is being discussed this afternoon. This reflects the foresight and willingness of the National Supervisors Forum to recognise the challenges facing the sector.

    As yet it is unclear as to the level of restructuring that is likely to take place over the next couple of years. However it cannot be ignored in that we are now seeing an increasing number of credit unions coming under financial stress. The trend in arrears is continuing upwards and the opportunities for prudent lending are decreasing. Income is depressed and costs are either remaining static or increasing.

    Should these trends continue it is not implausible that a significant restructuring programme for the sector may be required. If the sector is to remain sustainable in the long term then the time for progressive solutions to the circumstances arising in the credit union sector may be coming soon – if it’s not here already. This will call for strong and determined leadership and indeed difficult and unpopular decisions may have to be made. The objective however is to make the credit union sector strong and healthy by identifying suitable and sustainable operating models and structures that will support credit unions for future generations. In this context and with regard to stabilisation arrangements for credit unions trends emanating from the sector are suggesting that even greater reform may be required than those envisaged in our recent consultation paper. We intend to bring forward proposals in this area early in the New Year.” James O’Brien, RCU, Nov 6th 2010

    @ P Breathnach care to mention the name of your credit union?


  • #10
    P. Breathnach
    Registered Users, Registered Users 2 Posts: 12,089 ✭✭✭✭P. Breathnach


    moorefield wrote: »
    Is the Central Bank being alarmist?

    Quite possibly. Regulation of CUs has been characterised by a light-touch approach that has some similarities with bank regulation. This means that there was some scope for the boards and credit committees to lose the run of themselves and, human nature being what it is, that happened in a number of cases. So far as I can see, the number of cases, and the extent of the risk at which CUs have been put, is not known.

    O'Brien's address is what might be expected in such a circumstance: sound loud warnings just in case.
    @ P Breathnach care to mention the name of your credit union?

    No. It would compromise my privacy.


  • #11
    murphy93
    Closed Accounts Posts: 38 ✭murphy93


    Worrying times, shounds like more problems mounting.


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  • #12
    moorefield
    Closed Accounts Posts: 31 ✭moorefield


    If I drive at 100mph in a 40mph zone I am responsible and accountable for my dangerous driving. Should the Gardai fail to stop me then who is to blame for the inevitable accident?

    Light touch regulation does not excuse credit union officer’s deliberate and knowing non-compliance with the law. The regulator has to date not used the sanction powers available to it which includes removing directors, managers and prosecutions for non-compliance offences through the courts. Instead it issued warnings.

    Many credit union officers knowingly engaging in reckless, negligent lending and investments which had and will result in large losses wiping millions off community capital.

    Since June this year the Central Bank that has undertaken stress tests and has the results of an in-depth review of financial stability. Its warning of problems can hardly be said to fit the category of Peter and the Wolf


  • #13
    joolsveer
    Registered Users, Registered Users 2 Posts: 2,297 ✭✭✭joolsveer


    P. Breathnach wrote: »
    Quite possibly. Regulation of CUs has been characterised by a light-touch approach that has some similarities with bank regulation. This means that there was some scope for the boards and credit committees to lose the run of themselves and, human nature being what it is, that happened in a number of cases. So far as I can see, the number of cases, and the extent of the risk at which CUs have been put, is not known.

    O'Brien's address is what might be expected in such a circumstance: sound loud warnings just in case.



    No. It would compromise my privacy.

    I received the annual report from my credit union yesterday and I was happy that on the published figures they appear to be solvent in a time when other financial institutions are costing us an arm and a leg. If I had money in the banks would it be wise to move it to the credit union?


  • #14
    P. Breathnach
    Registered Users, Registered Users 2 Posts: 12,089 ✭✭✭✭P. Breathnach


    moorefield wrote: »
    If I drive at 100mph in a 40mph zone I am responsible and accountable for my dangerous driving. Should the Gardai fail to stop me then who is to blame for the inevitable accident?

    Light touch regulation does not excuse credit union officer’s deliberate and knowing non-compliance with the law.

    That's not my message.
    The regulator has to date not used the sanction powers available to it which includes removing directors, managers and prosecutions for non-compliance offences through the courts. Instead it issued warnings.

    That's getting a bit closer: a regulator who has not been very hands-on might come to recognise that things might not be run to an appropriate high standard, but might not actually have sufficient information to be sure. In such a circumstance, making loud warning noises of a generalised nature could be an ass-covering exercise.
    Many credit union officers knowingly engaging in reckless, negligent lending and investments which had and will result in large losses wiping millions off community capital.

    And many did not. Show evidence, if you want us to believe that the CU movement as a whole is in a parlous state.
    Since June this year the Central Bank that has undertaken stress tests and has the results of an in-depth review of financial stability. Its warning of problems can hardly be said to fit the category of Peter and the Wolf

    Really? Then show us the evidence.


  • #15
    Sponge Bob
    Banned (with Prison Access) Posts: 25,234 ✭✭✭✭Sponge Bob


    P. Breathnach wrote: »
    And many did not.
    Most did not. If the reserves are healthy (as a % of assets) and have not dwindled overly in the past few years there is nothing to worry about.

    Your local credit union will still lend to you when you really need that car for the new job where a bank won't.

    GO to that AGM and do ask questions instead of muttering on the Internets about it.


  • #16
    moorefield
    Closed Accounts Posts: 31 ✭moorefield


    Yup some will lend the money for the car – that’s not the problem. The problem is some can’t as they are hamstrung by having to provide for reserves and bad debt provisions on arrears and rescheduled loans. Of the €14.5bn in assets less than €7bn is out in loans – of these 14% are impaired (CBI/ILCU). The balance of excess funds which is about €6.5bn is largely on deposit with the banks.

    Credit unions are charging 9% (average) for loans making 3-4% from deposits in the banks and only paying savers 0-1.5%. Where’s the margin going? Into bolstering reserves and bad debt provisions. They are sitting on about €3-€4bn (net of liquidity) of money that could be used to make good loans. Thing is good loans are hard to make in these trying times. And loan demand is dropping – there are not enough new loans to replace the ones that are being paid off. Credit unions need to re-lend 35% of their loans every year to stand still.

    All this means is as balance sheets shrink with declining loans and savings levels, with a high largely fixed cost base, higher bad debts and write offs something has to give. First to go is the dividend rate and as it falls to zero then solvency quickly becomes an issue as operating losses (income less operating costs) can only be funded from non-regulatory reserves.


  • #17
    P. Breathnach
    Registered Users, Registered Users 2 Posts: 12,089 ✭✭✭✭P. Breathnach


    joolsveer wrote: »
    I received the annual report from my credit union yesterday and I was happy that on the published figures they appear to be solvent in a time when other financial institutions are costing us an arm and a leg. If I had money in the banks would it be wise to move it to the credit union?

    I'm not going to set myself up as a financial advisor! Some of my savings are on deposit in a bank; some are on deposit in a CU. I have no plans to move funds either direction.


  • #18
    moorefield
    Closed Accounts Posts: 31 ✭moorefield


    The Central Bank's techical statement:

    Credit Unions
    13. A significant strengthening of the regulation and stability of the credit union sector will be carried out by end-2011. These measures will be based on the results of the Central Bank’s loan book review, the Central Bank’s sector-wide stress test and the outputs of the Strategic Review of the credit union sector.

    What does "significant strengthening" mean?


  • #19
    Liam Byrne
    Closed Accounts Posts: 18,163 ✭✭✭✭Liam Byrne


    RoverJames wrote: »
    When your money is in the CU you have still given anglo something like €20,000 though so you may as well take the 3% ;)

    You have a point, but only because FF chose to manufacture that scenario.

    But not a hope in hell. It's the moral equivalent of accepting money from the local drug-dealer.

    I don't support tacitly accepting the proceeds of a crime, and just because it's government-condoned doesn't change my principles.


  • #20
    moorefield
    Closed Accounts Posts: 31 ✭moorefield


    Credit unions have been included in the Government's special resolution regime for credit institutions.

    When enacted the Minister for Finance will have powers to take over a credit union, issue special investment shares and direct the tranfer of its business to other credit insitutions (banks, building societies, credit unions).
    On transfer credit union members share accounts can be converted to deposit acounts.


  • #21
    flutered
    Registered Users, Registered Users 2 Posts: 6,693 ✭✭✭flutered


    my two cents, if the banks had been run like the credit unions for the past ten years, we would not have to subsidise them, i have been with the credit union for roughly thirty years, when i had nothing they helped me, with each loan i took out when it was repayed i had a nice little sum saved as well, thankfully i do not need credit for the forseeable future, i have a sum in deposit with them, i will leave that there, because now more than ever people will need help just as i did, some time back i suggested that people use the credit union more than the bank, as the their attitude was not great to customers regarding charges.


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  • #22
    moorefield
    Closed Accounts Posts: 31 ✭moorefield


    @ P Breathnach: your optimism seems to have been misplaced: recent data confirms credit unions are in trouble and may need Government stabilisation funding of upwards of €1.5bn according to Professor Ray Kinsella. Charlie Weston reckons its about €500m. Of the 409 credit unions 80 are in serious trouble and will not survive as independent entities. Another 146 are deemed high risk by the central bank following its stress tests. It's hinting at a consolidation programme that will shrink numbers from 409 to about 100. Only 46 are deemed financially strong. Begs the question what have they being doing the others weren't?

    Thing is how will such large consolidation programme be managed and who is going to do it?
    See here for the consolidation data emerging. Seems its time to stop thinking parish and start thinking county when it comes to credit union common bonds.

    @fluttered - if you really want to know how many credit unions were managed in the past ten years read this. You might also find this interesting


  • #23
    annacanna
    Registered Users Posts: 120 ✭✭annacanna


    this year i got 1% diviends and more recently i got a letter saying that the interest rate for my loan(share quranteed) was being reduced by 1% to 4.5%.
    dose this seem like a good sign or a bad sign ie. they want more people taking out share quarenteed loan to make interest on them?
    im a little confused by it, i have about 10,000 in shares and 5,500 loan, and i have my daughters (2 years) there too with 5,000 in shares


  • #24
    AlekSmart
    Registered Users, Registered Users 2 Posts: 14,005 ✭✭✭✭AlekSmart


    moorefield wrote: »
    The Central Bank's techical statement:

    Credit Unions
    13. A significant strengthening of the regulation and stability of the credit union sector will be carried out by end-2011. These measures will be based on the results of the Central Bank’s loan book review, the Central Bank’s sector-wide stress test and the outputs of the Strategic Review of the credit union sector.

    What does "significant strengthening" mean?

    Thus far,Moorefield,it appears to have meant the sudden and apparently insatiable appetite for paperwork...often of the most arcane type...

    I'm not sure if it's settled down yet,but in the early stages it appeared necessary to assume ALL Credit Unions were being run as Mirror Images of Anglo-Irish Bank.....thankfully apart from a notable few who lost-the-plot,they were'nt :)


    Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.

    Charles Mackay (1812-1889)



  • #25
    Pharaoh1
    Registered Users, Registered Users 2 Posts: 354 ✭✭Pharaoh1


    moorefield wrote: »
    Yup some will lend the money for the car – that’s not the problem. The problem is some can’t as they are hamstrung by having to provide for reserves and bad debt provisions on arrears and rescheduled loans. Of the €14.5bn in assets less than €7bn is out in loans – of these 14% are impaired (CBI/ILCU). The balance of excess funds which is about €6.5bn is largely on deposit with the banks.

    Credit unions are charging 9% (average) for loans making 3-4% from deposits in the banks and only paying savers 0-1.5%. Where’s the margin going? Into bolstering reserves and bad debt provisions. They are sitting on about €3-€4bn (net of liquidity) of money that could be used to make good loans. Thing is good loans are hard to make in these trying times. And loan demand is dropping – there are not enough new loans to replace the ones that are being paid off. Credit unions need to re-lend 35% of their loans every year to stand still.

    All this means is as balance sheets shrink with declining loans and savings levels, with a high largely fixed cost base, higher bad debts and write offs something has to give. First to go is the dividend rate and as it falls to zero then solvency quickly becomes an issue as operating losses (income less operating costs) can only be funded from non-regulatory reserves.

    I used to regularly get CU loans but have given up on them. Why pay 9% on a loan when you can use your deposits/shares which were earning 0.5% dividend. The CU don't encourage this but 9% is way too high.
    Also I'm a little unhappy that some of the margin (a sizeable amount in the case of my local CU) is an employer contribution to a defined benefit pension fund for the employees. I have no problem with people providing for their pensions but I have no interest in funding this scheme with thousands of euro in interest payments when at the moment I can't afford to contribute to my own pension.
    Never thought I'd say this but I think for future finance I'll be going back to the bank.


  • #26
    Monty Burnz
    Closed Accounts Posts: 12,455 ✭✭✭✭Monty Burnz


    moorefield wrote: »
    In viewing your credit union accounts you would need to adust them on a gone concern basis before concluding you would get all your money back -in any event €100,000 is covered under the deposit guarantee scheme.
    Are we confident that the government's guarantee is worth a tinker's curse at this stage?


  • #27
    the groutch
    Closed Accounts Posts: 16,096 ✭✭✭✭the groutch


    think this is a double-edged sword, with there being reckless investment of savings.
    I recall in the accounts for the year just before I closed my account for them (2008 afaik), they had significant investment losses which decreased the dividend from 2.5% to 0.5%, it hadnt reached a point of any significant bad debt realisation at that stage.
    I'm not saying this is the case for every individual CU, but imo they should have stuck to the knitting, small loans and guaranteed dividends.
    But they got too big for their own boots, increasing limits to €20,000+, and gambling with money that wasnt theirs to do it with.


  • #28
    moorefield
    Closed Accounts Posts: 31 ✭moorefield


    @aleksmart. Of the 409 credit unions only 46 are deemed at low risk by the central bank following at least three differing stress tests. The blog irishcuvoice.com has some good performance data including a list of over seventy credit union's dividend payments for last year. This list contains large, medium and small credit unions. Anyone familiar with the financial strategy and financial accounts of an Irish credit union will know that the ability to pay a dividend is a key stability indicator. One of the big problems facing most of the ones that matter is a collapse in new loans since 2008. In some serious cases new loans are down 50% - the average for 2010 was 27%. This means that loan interest income is set to dramatically decline at a time when credit unions need the income to fund bad debt provisions, write offs and investment losses and of course maintain reserves. Why is the dividend important - well any credit union paying less than 1% is experiencing quite acute financial problems. Those that haven't paid anything in the past two years are insolvent basket cases.
    I particularly recommend this article from May 2008 it's quite an accurate portrayal of what went wrong with credit unions from 1998 onwards.


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