Friday, 17 June 2011

Bail-In Maybe Necessary to Strengthen Vital Role of Credit Unions

The Credit Union movement is under growing pressure. This pressure arises from the effects of the on-going economic crisis. Rising unemployment, falling disposable income and high levels of indebtedness are pushing up existing- and like future- payments arrears. This, in turn, is impacting on their reserves and capital. At the same time, investment income on deposits has been reduced because of developments in global stock markets and historically low interest rates.

However, in sharp contrast to the banking system there are strong reasons for believing that not alone will the credit union movement come through these difficulties but, with the right kind of leadership, may well be on the brink of a process of renewal.

To do so, the movement will have to deal with two sets of challenges. The first is how best to deal promptly and effectively with growing arrears and making provision for the increased levels of risk embedded in their loan book. The second relates to a process of fundamental regulatory form, which is part of the IMF-EU-ECB Bailout, these reforms are aimed in strengthening the internal systems and capabilities of Credit Unions; of enhancing governance at board level and also of introducing a new stabilisation regime, including, in the last resort arrangements for winding up unviable credit union and transferring both deposits and members to other stronger units. At the same time the reforms envisages a sharp reduction in the number of credit unions by more than half. All of this will, almost certainly, acquire financial support. It would be premature to put a figure on this but it is likely to be of the order of One and a half Billion.
 This should not be seen as a ‘Bank Bailout’ in the sense in the sense of which Ireland has become all too familiar. It would be more appropriate to call it a ‘Bail-in’. The ‘Business Model’ at the heart of the collapse of the banks was self inflicted; the banks were deaf to the warnings of many within the banks themselves and also outside of the banks. In complete contrast the model which drives credit unions is based on voluntarism. It is based on a culture of cooperation, of self-help and of encouraging savings and thrift. These were precisely the values which were’ Crowded out’ by the short term-ism of the banks and by their fixation on shareholder value and maximizing profits.
Credit Unions have retained the trust of their members and also of the wider public at a time of financial stress and economic desolation. That Trust is the platform on which credit Unions will renew their mission and their mandate of service to the communities to which they are rooted.

The regulatory reform process poses serious challenges. The time scale is far too short  and would appear to be driven not by the imperative of getting it right but rather of getting it done: Ticking the box.  The need for reform and strengthening is evident. Fracturing in public trust and confidence in the credit union movement would have the most far reaching consequences. The credit union movement with its extensive membership base, total assets of fourteen Billion which are an integral part of right across the country, are very much the ‘last man standing’. But rush legislation is usually bad legislation. There is a strong regulatory capability in the Central Bank overseen by the registrar of creditary Unions. There has, over the past two years, been a strong and proactive engagement by the department of finance by the Oireachtas as well as by the Credit Union Advisory committee with the credit union representative bodies. All of this provides a favourable environment within which to set out the conditions for a strengthening in risk management as well as putting in place new structure for ensuring the sustainability of the movement.
 Equally, a ‘One size fits all’ approach to regulation, which would involve imposing the same burden on credit unions as on banks would be unnecessary undesirable and unworkable, what is important is a proportionate regulatory and government system, based on the intrinsically sound and ethical ‘business model’.
 Equally important the credit union movement itself which is beset by historical divisions will need to come together and demonstrate the kind of leadership that reflects the enormous importance in Ireland and on the Island : and which demonstrates a conviction that, had the banking system retained the kind of values which are at the heart of Credit Union, The country would not be in the position it is in today.
 The credit union movement is the benchmark to which any sensible rebuilding of the banking system should be measured  

Abridged version of paper delivered at CUNA Mutual Conference, Dublin Castle, 15th of June 2011

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