28/04/10

I believe that the Central Bank Bill in its current unamended form, places onerous restrictions on credit unions

Part 7 of the Bill which refers to Section 15 (7) of the Bill, which seeks to amend Section 35 of the Credit Union Act, will make it impossible for credit unions to undertake rescheduling and pay a dividend to members as the cost to CU's of additional reserves, arising from the rescheduling would leave nothing to pay out by way of Dividend.

 This could cause members to withdraw savings from credit unions, resulting in CU's having less money to loan out, and forcing members into the hands of loan sharks and money-lenders.

The Minister for Finance undertook, in April 2009, to review Section 35 of the Credit Union Act 1997 to make it easier for credit unions to accommodate members desiring to reschedule loans due to the recession.

You will be aware that the Economic Regulatory Affairs Committee has undertaken extensive consultations with all of the representative bodies in relation to this and other Regulatory provisions.

I will go so far as to say that the Economic and Regulatory Affairs Committee consultations have surpassed those of the Department of Finance, in that The Department of Finance's consultation process has been very limited, and technical difficulties are now manifesting on the eve of this legislation.

I understand that the Expert Committee established by the Minister's Department was limited in its membership and met very infrequently.

The proposed Regulatory requirements underpinning this legislation will result in the opposite to what the Minister intended, unless amendments are agreed.

 It will lead, if unamended, to a more restrictive regime around credit unions, denying them the ability to meet the needs of some members impacted by unemployment, wage cuts and public service levies.

This is surely NOT what the Minister intended.

It is impossible, and unwise, to look at the Central Bank Bill, as it relates to an easing of restrictions on Credit Union loan duration limits, without looking at what the Registrar proposes as the underlying requirements and operational guidelines.  

The Registrar of Credit Unions viewed the proposed legislative change as an opportunity to impose yet more stringent reserve and liquidity requirements upon Credit Unions.

This has to be seen in the context that Credit Unions are the most reserve-rich financial institutions in the state. The Registrar introduced a Regulatory or non-distributable minimum capital reserve requirement of 10% for credit unions in 2009 - a very stringent reserve requirement given that banks are baulking at their new standard of 8%.

It should also be measured against the fact that the vast majority of credit unions benefit from an additional layer of protection in the form of a self-funded, mutual stabilization fund, the Savings Protection Scheme of the Irish League of Credit Unions.

 There is a very real danger of over-egging the cake here. The Registrar's proposes to apply his Section 35 requirements to ALL credit unions, regardless of whether a credit union wishes to avail of the extension to the Section 35 limits or not. This simply does not make sense.

The Registrar is proposing a liquidity requirement of 25% to 30% where the Section 35 exemption is availed of. Even the current 20% liquidity requirement is very onerous when measured against the standards the Regulator currently applies against banking.

There is every danger here that the combination of the Registrar's and Minister's proposals will have the impact of rendering it impossible for credit unions to pay a dividend to their members. If all surplus funds must be ploughed into yet additional reserves, then credit union dividends will suffer, driving funds out of responsible credit unions and into irresponsible banks.

No credit union has needed to be bailed out by the state, and the Minister needs to remember this.

No tax-payers' money has been poured into a single credit union. In addition to this, the vast majority of credit unions are part of a voluntary, mutual stabilisation fund which acts as a back-stop to the State Guaranteed Deposit Guarantee Scheme, and there are ongoing calls for the extension of such a stabilization scheme to be regulated by the Registrar of Credit Unions and extended to all credit unions in the state.

The Registrar seems to be taking the view that every rescheduled loan is an ‘at-risk' loan. This is a fallacious theory.

Many credit union members are taking the responsible route when confronted by a drop in income, and approaching their credit unions immediately, before arrears occur, and have been successfully renegotiating their payments. The proposals before this house to-day, if unaltered, will tie the credit unions hands behind its back. It is inconsistent of the Regulator on the one hand to encourage banks to reschedule loans for their borrowers while at the same time financially penalising credit unions that seek to accommodate their members.

Practical amendments need to be agreed at Committee stage. A balance needs to be struck between the needs of borrowers and of savers and the need to supplement already strong reserves.

I understand that the credit union representative associations, including the Credit Union Development Association, the Credit Union Managers Association, the Irish League of Credit Unions, the National Credit Union Supervisors Forum and independent Credit Unions have been in negotiations with the Regulator and with the Department of Finance on these issues, and I look forward to positive, enhancing amendments being brought forward that will add strength to one of the few bright lights on the financial horizon, the Credit Union movement.

The Minister for Finance set out, in April 2009, to make it easier for Credit Unions to respond to the needs of members experiencing unemployment and reduced incomes by affording greater flexibility to credit unions to extend loan terms, where necessary, beyond 5 years.

His Department entered into very limited consultation on the matter, and it was the Registrar of Credit Unions and not the Department that became the driver in this reform. The result is legislation that makes it more difficult for credit unions to respond to such member-requests through making it more expensive, for Credit Unions to respond to reschedule loans.

I am not saying that Credit Unions should not have strong reserves. Far from it! I fully support the Registrar's introduction of the Regulatory Reserve Requirement of 2009, and commend credit unions for building up their capital reserves to 10% resulting from this requirement. This compares favourably with an 8% equivalent for banking.

I think that this house should, however, pause for thought when we see yet another reserve-driven initiative from the Registrar that has not been the subject of a Regulatory Impact Analysis. Credit Union representative associations are responsible bodies. They are warning against the financial impact of this latest, and dare I say, hurried imposition by the Registrar. It is unwise for this house to consider such an imposition when the Registrar, and the Department have clearly not undertaken an impact analysis. Impact models produced by credit union bodies show many credit unions facing nil-dividend returns to members as a result of the Minister's proposals.

The proposed change will not address the needs of unemployed credit union members. It will make it impossibly expensive for credit unions to respond to the needs of their members. In addition, and equally important, this measure will jeopardise the ability of very many credit unions to pay dividends to their members. This will drive money out of credit unions in time, and ultimately damage this great, not-for-profit resource. Ultimately, the only bodies that will gain from weakening the credit unions will be the banks and money lenders.

This hurried and ill-conceived proposal merits careful scrutiny before irreparable damage is done to the one sector of our financial services sector that has neither sought nor demanded bail-outs at the tax-payers expense. This is a responsible sector, with its own stabilisation fund. When we hear warnings from the credit union representative associations of the damage that this reform will bring, I suggest that we should listen carefully and act cautiously.

The Registrar of Credit Unions has very extensive powers to regulate credit unions, and is currently overseeing a review of the credit union sector on behalf of the Department of Finance. Radical proposals on heaping additional reserves on an already reserve-rich credit union sector needs careful consideration. I urge careful consideration and dialogue with the representative associations.

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