THE FINANCIAL Regulator has warned credit unions to remain vigilant as they brace themselves for another challenging year.

Matthew Elderfield said credit unions will face further pressures because of the extraordinary economic circumstances facing Ireland, and warned they are in the “front line of the battle to ensure these problems are kept at bay”.

Mr Elderfield made his comments during a speech at the Irish League of Credit Unions agm.

Mr Elderfield said the reserves and liquidity positions of most credit unions had improved over the last 12 months, but warned of worrying developments.

“Loan arrears have risen sharply over the last two years and the level of rescheduled loans has also risen,” he said. “As your members face difficult times, credit unions will have to remain vigilant. The impact of high unemployment and weak economic growth on the credit union sector will be inevitably significant.”

Mr Elderfield said credit union directors will be required to strike a balance between dividend distribution policy and the retention of reserves to protect members’ savings.

He also spoke of the “clear need” for Ireland to overhaul its approach to financial regulation. He said he intends to implement a framework of assertive risk-based regulation, underpinned by the threat of enforcement. He assured delegates this would not mean a “one-size-fits-all approach”.

As requested by Minister for Finance Brian Lenihan, the regulator is carrying out a review of the credit union sector, which Mr Elderfield said would be completed by the end of March 2011.

“Our approach will allow us to differentiate between the firms we regulate. This means that the rules for credit unions will not be the same as those applied to big, systematically important banks,” he said.