EU approves ongoing credit union restructuring

The Government's scheme to restructure credit unions has been, for the ninth time, reauthorised by the European Commission.

Initially approved in October 2014, the scheme was designed to underpin the stability and long-term viability of individual credit unions and the sector in Ireland as a whole.

Restructuring approved under the scheme involves the merging of credit unions that have “ample reserves” with those that have a gap. Such a merger can provide a capital injection to make up any shortfall in the capital reserve requirements of the merged credit union.

A Central Bank of Ireland review published in February found that restructuring has "transformed the sector". In the decade to September 2018, the number of small credit unions has reduced by half while the number of large credit unions almost doubled.

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The review by the regulator found that cost-to-income ratios are “high by historic standards” and represent a challenge to the sustainability of credit unions.

“Total income levels have fallen across the sector, with weak demand for credit resulting in an overall loan-to-assets ratio decline across the sector,” the bank said.

Engagement

The bank suggested that credit union boards, when considering their strategy, consider the opportunities that a merger can bring, particularly with membership and engagement.

And while lending is likely to grow, a reduction in expenses can be expected, given data published by the bank. It found those credit unions that had engaged in restructuring had seen a lower rate of increase in expenses (not including salary costs) than those that had not – 25 per cent compared with 39 per cent – “indicating that credit unions restructuring have been able to achieve economies of scale”.

“The commission found that the measure ensures that the beneficiaries become viable in the long-term through restructuring or merging with sound credit unions, and that they contribute to the cost of restructuring,” the commission said.

“Moreover, the impact on competition is limited because credit unions are small and do business only with members. Until now, the Irish authorities have managed to restructure credit unions without granting any aid under this scheme,” it added.

The onus is on the Government to update the commission every six months with a report on the operation of the scheme. Formal reauthorisation is then granted as long as State aid rules have not been breached.

The approval of the scheme is valid until October 31st this year.