Credits and Loans

Bank’s fears over future of credit unions

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Significant concerns over the viability of Irish credit unions were discussed by members of the Central Bank board late last year, it has emerged.

Minutes from the meeting of the Central Bank Commission, published by the regulator, showed directors were worried about a range of issues, including proposals relating to mortgage lending. This comes as a surprise as it would be expected that mortgage loans especially from wholesale mortgage lenders like credit unions, may be plain sailing and successful. And not all areas will be having a problem with this of course. However here, it seems that this reliability has been compromised and authorities have to rethink this service and the positive versus the negative effects of it.

Anne-Marie McKiernan, registrar of credit unions at the bank, said the sector faced “major structural challenges” despite making significant progress over the last few years.

Larger credit unions have become more prevalent in recent years, she said, but this was largely as a result of mergers as opposed to organic growth. Ms McKiernan said “significant gaps” remained in supervisory standards, and that without more transformation in their business models, the sector was “not likely to recover significantly further”.

Ms McKiernan said that there was a gap between the bank’s expectations and some credit unions regarding the capability and skills needed to significantly change business model and balance sheet-management practices.

The key objective should be to turn members into borrowers because that was the only way to ensure long-term viability of the institutions, she said. A small increase in net lending and strong levels of cash reserves, liquidity and provisioning were highlighted as key financial achievements across the sector.

Longer term concerns remained, however, including the fact that savings were growing at a faster rate than net lending, and were considered by the bank to be “impacting on future viability”. One board member expressed concern over a proposed move into the mortgage lending market.

Last month a group of almost 40 co-operatives affiliated to the Credit Union Development Association announced plans to take this step, with up to €400 million available for loans. The board meeting took place before the announcement was made, but the credit unions involved had been developing a framework to support mortgage lending over the previous ten months. These measures included making underwriting and legal services available to credit unions entering the market. At the time of the announcement, the group called on the Central Bank to loosen restrictions that limit the long-term lending of credit unions to 10 per cent of their total loan book.

The Central Bank’s December board meeting heard that “it had been made clear” to credit unions that there would be a requirement to “fully understand the impact” of the mortgage lending proposals on their balance sheets.

A spokeswoman for the Irish League of Credit Unions said that last year was “very positive” for its members and that arrears fell for 19 consecutive quarters. “While lending has increased for the last five out of six quarters and is up by €216 million, growing the loan book continues to be a priority for credit unions,” she said. “The ILCU believes that it is vital that the long-term lending limits imposed on credit unions are amended to give credit unions the opportunity to offer mortgages in a significant way.”

Separately, Derville Rowland, director of enforcement at the Central Bank, described last year as a “very challenging period” for the staff in her department.

The regulator levied a record €12 million worth of fines against financial institutions last year. While the number of staff assigned to the division increased during the second half of the year, resourcing remained a challenge, Ms Rowland said. The bank was recruiting 154 people across a range of functions as of the end of November, Gerry Quinn, the Bank’s chief operations officer, said.

Philip Lane, governor of the Central Bank, said that reducing the level of non-performing loans on Irish banks’ balance sheets remained a priority. He said the level of NPLs remained elevated despite declining from 57 per cent of all loans in 2013 to 17.3 per cent at the end of last year.