Newbridge in trouble
Two negative developments last weekend have cast a cloud over the State’s preparations for a successful exit from the bailout programme next month. First, the announcement by RSA, the UK parent company of Ireland’s largest insurance group, that it was injecting €100 million in additional capital to boost the reserves of its Irish subsidiary. RSA Insurance Ireland also suspended three of the company’s top executives, pending the result of an investigation into accounting problems at the company. Second, came the move by the Central Bank, late on Sunday night via a successful High Court application, to bring one of the country’s largest credit unions – Newbridge Credit Union (NCU) – under the control of a bank, Permanent TSB (PTSB).
In the first instance, RSA’s decision to boost capital reserves at its subsidiary involves no cost to taxpayers, unlike Quinn Insurance. However, motor insurance premiums do seem likely to rise, given tighter regulation by the Central Bank to ensure reserves set aside by motor insurers are adequate to meet personal injury claims. In the second instance, the taxpayers have once again been called on to rescue another financial institution, this time a credit union. Taxpayers, having spent some €65 billion in bailing out the banks, are required to write a smaller cheque – €53 million. The Central Bank acted to avoid a potentially greater financial catastrophe that might have followed the liquidation of NCU. This included both the risk of losses on members’ deposits over €100,000, not covered by the deposit guarantee scheme; and the risk of contagion spreading to include other credit unions, and thereby threatening stability and public confidence in the general banking sector.
The Central Bank had no choice but to act quickly, and decisively. Since 2008, it has been trying to deal with financial and governance problems at the credit union, without success. This involved appointing a special manager in 2012, and seeking a merger with another credit union. After Naas Credit Union decided against it, and as most banks showed no interest, the Central Bank decided “the transfer to PTSB was ultimately the only viable solution available”. For a credit union running out of money and facing insolvency and liquidation within days, there was no alternative course of action open to the Central Bank.
As yet the full details of NCU’s financial difficulties have not been disclosed. But what the Central Bank has disclosed is that “Its lending practices differed from what was typical of the credit union sector with loan sizes that were many times the average”. Whether other credit unions are facing similar difficulties is unclear - something the Central Bank now needs to clarify.