Credit unions allowed to accept deposits of €100,000 plus

Central Bank set to soften rule which has raised the ire of the industry

The Central Bank said that credit union lending continues to fall, dropping from €7 billion in 2008 to just €4 billion in 2015 - a near 15-year low. (Photograph: Matt Kavanagh/The Irish Times)

The Central Bank said that credit union lending continues to fall, dropping from €7 billion in 2008 to just €4 billion in 2015 - a near 15-year low. (Photograph: Matt Kavanagh/The Irish Times)

 

The Central Bank is set to amend a new rule introduced on January 1st which prevented credit unions from accepting deposits of more than €100,000 per member.

Speaking at the Credit Union Development Association (CUDA) annual conference in Cavan on Saturday, Registrar of Credit Unions Anne Marie McKiernan said that the regulator will shortly set out the application process for credit unions looking to either retain, or accept new deposits in excess of the €100,000 limit.

The speech from the registrar comes soon after the introduction of new regulations for the sector on January 1st, 2016, rules which have been described as “draconian” by some in the industry. In particular, the industry argued that the aforementioned €100,000 limit on deposits per member is “not appropriate” for credit unions, given that no such limit applies to banks.

At the conference Ms McKiernan said that “in a further example of our responsiveness to adapting aspects of our regulatory rules where there is a good business reason to do so” the regulator is now considering allowing credit unions to take in new savings of over € 100,000.

“In the coming weeks, we will set out our application processes for retention and for accepting new deposits over € 100,000 and will liaise with the main representative bodies on this matter,” she said, adding that when the application processes are finalised, the Central Bank will provide credit unions with application forms accompanied with explanatory notes for each application process.

The Department of Finance had previously indicated that the rules would be reviewed by June by a committee that advises the Government on credit union policy, while bigger credit unions would be allowed to apply to attract new deposits over € 100,000.

Ms McKiernan’s comments came in a speech which illustrated clearly the challenges facing the sector, such as a plummeting demand for lending and difficult investment environment.

Overall, Ms McKiernan said that the regulator sees four main requirements for the sector’s future sustainability.

“Further restructuring; a greater drive for new, active borrowers; a marked increase in core lending, and business model development in a multi-step, well-managed way,” Ms McKiernan said.

Lending

Credit union lending continues to fall, dropping from €7 billion in 2008 to just €4 billion in 2015 - a near 15-year low - with total interest income down 40 per cent.

“The increase in aggregate new lending volume disguises a continued downward trend in numbers of new loans; deleveraging remains an important constraint on loan recovery, and arrears remain unacceptably high at 13 per cent,” Ms McKiernan said.

Following the crash, the Central Bank imposed lending restrictions on 199 credit unions, and this has since reduced to 102, Ms McKiernan said.

“Overall, this represents an important step by a large number of credit unions to improve their credit risk management to meet their regulatory requirements. I very much welcome this improvement and the fact that 80 per cent of applicant credit unions under the initiative were successful in having their restriction removed,” Ms McKiernan said.

However, she added that “102 lending restrictions still in place - is still far too high” and she warned that such a restriction should show members of a credit union that it “has failed to demonstrate to us that it is meeting the relevant regulatory requirements that are in place to best protect members’ funds”.

On the restructuring front, Ms McKiernan said that the number of credit unions shrunk from 383 to 335 in 2015 alone, “ a sizeable achievement, and we understand that there is a significant pipeline of cases with ReBo”. Rebo’s mandate has been extended to end-March.

Product development

Credit unions have suggested that the new regulations have been holding back the sector, particularly in terms of generating new business, such as moving into home loans.

However, Ms McKiernan strongly refuted the view that it is the Central Bank that is holding back the development of credit unions into new business areas.

“We would dispute that. In our view there is scope for credit unions to undertake significant development within the current regulations. Where credit unions can make a credible, well-constructed and prudent business case and we consider that current regulations may be restricting, we have stated that we will use our powers where appropriate to amend or introduce new regulations.”

Investments

Against a background of low interest rates, Ms McKiernan noted that “traditional investment returns continue to decline and will pose a threat to viability for many credit unions”.

However, she warned boards of credit unions not to chase yield by making investments that involve undue risk to members’ savings.

“There should be realistic expectations about the future orientation of interest rates and investment returns,” she said, adding that with the new regulations, the regulator may now facilitate new investments classes that may be considered “appropriate and prudent”.