THIS YEAR HAS seen major upheaval for a small number of credit unions.
But what is affecting credit unions?
Because the movement is made up of credit unions, the answer to that is hard to quantify. There are governance issues, regulatory concerns, economic realities and genuine money problems.
But there is another reason why a number credit unions may be falling below their statutory reserve figure: their buildings.
All credit unions are required to have at least 10% of their stated assets held in reserve at any time.
Part of this reserve can be made up of the value of buildings. However, the Central Bank has over the last number of years changed the valuation method.
In what they say is a move of standard accounting practice, the Central Bank wants credit unions to value the buildings at current market value, even if they are not looking to move the asset.
This means that when credit unions’ buildings are revalued, they are forced to write down large amounts in one go.
This can mean a massive loss shows up in accounts, even though the institution may be trading profitably.
To get around this, credit unions wanted to use the value in use calculation. This figure allows businesses calculate the value an asset provides for its owner as long as it is in use.
Using this valuation, credit unions can ask their auditors to project forward 20 years of accounts to give a calculation of how much surplus the building will help the institution generate, as well as giving an idea of how much it could raise if it had to be sold immediately.
However, as soon as a value in use calculation shows a loss, the credit union has to take the loss on the building and write it down to market value.
This generally wipes out any surplus a credit union has and depletes capital reserves. Any credit union who falls below 10% in their capital reserves is immediately placed on a Central Bank watchlist. Those who drop below 7.5% are considered in jeopardy.
The only way to plug this gap is to hope for a bettering economic climate and a massive upsurge in demand for lending, which is unlikely in the short term or apply to the Irish League of Credit Unions savings protection scheme to plug the gap.
In the case of Newbridge, it was not possible for the ILCU to plug this gap as Newbridge had left the league. In the Howth-Sutton case, the Central Bank agreed to a €2.1 million payout from their resolution fund.
While the Central Bank says that this is just standard practice, credit unions argue that there is no reason for this immediate write down. They would rather an accelerated depreciation because they have no intention of selling their building. Some in the movement have begun examining the feasibility of selling their buildings to property management companies on long term leaseback deals.
However, even that may not soften the impact on reserves.