You know who calls the shots

The Bottom Line: It's an Irish solution to an Irish problem. The taxpayer bails out Newbridge Credit Union (NCU) to the tune of €54 million and nobody is held to account. It's like the banks in 2008 all over again except that things were supposed to be different now.

On that point, it’s worth noting that the fitness and probity regime in relation to directors and senior executives that is operated by the Central Bank has only applied to credit unions since August 1st and only for those credit unions with total assets greater than €10 million. For the balance of credit unions, it won’t apply until August 2015. It is not restrospective.

Debacle
The Central Bank's new enforcement sanctions also took effect for credit unions on August 1st and, again, are not restrospective. Who is responsible for this debacle?

In his affidavit to the High Court for last Sunday's emergency sitting, which led to NCU being acquired by Permanent TSB with assistance from the State, Patrick Casey, the head of resolution mergers and acquisitions in the special resolution unit of the Central Bank reminded the judge of the "very serious condition" NCU was in following "poor governance" and inadequate controls over several years. In the three years to September 2011, €3.9 million of loans were written off and an additional €36.3 million of bad loan provisions were booked. Provisions increased from 3.4 per cent of gross loans to 30.5 per cent over the period while the total realised reserve ratio fell from 14.6 per cent to 5.4 per cent. Members' savings fell by more than 20 per cent over the period to €152 million.

Questions must therefore be asked of the board of directors, chaired by Ben Donnelly, and management of NCU who set the lending policy that blew up in its face. It was their strategy that failed spectacularly and left the institution in crisis.

Casey’s affidavit noted a report prepared by auditors for the board of NCU in December 2011 that highlighted 603 “special examination loans” totalling €40.3 million. These were non-standard loans, identified for write-off, and loans with bullet-type payments at the end of the repayment terms. “Such loans are not common in the credit union sector,” Casey added.

Sizeableg loans
I'll say. Twenty six of these loans added up to €14.3 million or an average €550,000. This is far and above the types of loans that you would associate with the country's biggest "community" credit union. The average loan in the credit union sector at the end of 2011 was €7,764 compared with €17,281 at NCU.

Not so fast, say the directors, who issued a statement yesterday stating that after “two years of direct Central Bank intervention with all management responsibility in the hands of the Special Manager [Luke Charleton of Ernst & Young], what started as debatable concerns about bad debt provisioning ended up as an acute liquidity crisis forcing an urgent transfer to a commercial bank”.

In August, the lobby group, Concerned Members of Newbridge Credit Union, issued 31 questions for the registrar of credit unions, a position within the Central Bank.

“The registrar enjoyed an enormous range of powers under the Credit Union Act 1997, such as the removal of a director or the appointment of a director to NCU. Did the registrar exercise any of these powers prior to the appointment of the special manager?” they asked. They feel “let down” by regulators.

Serious consequences
In its report last week to Governor Patrick Honohan, the Central Bank's special resolution unit said that if the special manager had not been appointed there would have been "extremely serious consequences" for NCU.

They state that if the credit union’s “true financial position” had been made public, there would have been a run on savings.

There is some merit to this. In the week after The Sunday Business Post detailed the then proposed merger of NCU with Naas Credit Union on July 28th, €2.9 million in members’ savings was withdrawn from NCU.

One thing that is not in doubt is that it took too long to reach this resolution. The intervening period created an environment of uncertainty around NCU and resulted in the media blowing the lid on its troubles.

From the time the special manager was appointed in January 2012 until November 1st of this year, the regulator’s focus was on finding a credit union resolution, or liquidation.

The banks only came into the equation this month when Bank of Ireland, AIB, Ulster Bank and Permo were asked if they were interested in taking over NCU’s assets. Only Permo replied in the affirmative.

Permo has its own bad loans issues and wouldn’t have been in a position to step in as a white knight last year.

The bank still has to receive formal European Commission approval for its restructuring plan. But the view is that it is once again a viable entity and it is back out touting for business. The proof will be in the pudding.

Taxpayers can rightly ask why they’ve been put on the hook, indirectly, for the bad loan decisions of a credit union in Newbridge.

The answer is probably quite simple. Ireland is due to exit its IMF-EU bailout on December 15th.

As yet, no precautionary credit line has been arranged as a safety net in case we can’t sell our bonds at reasonable rates on international markets.

Casey’s affidavit states clearly that NCU was not of systemic importance in “normal circumstances”. In other words, it wouldn’t bring the financial system crashing down.

But the failure of a credit institution “could contribute to unease within financial markets as to the underlying health” of the financial sector here. So the Government leaned on Permo to ensure that NCU didn’t go bust before we exited the bailout. Once again, bond markets are calling the shots.