WHEN THE CENTRAL Bank successfully applied to have Newbridge Credit Union taken over by Permanent TSB earlier this week, it raised a number of questions about credit unions as a movement.
Newbridge, one of the largest community credit unions in the country, had gone from 37,000 to 32,000 members in the last number of months, with up to €79,000 in savings being withdrawn daily.
It had had a special manager appointed in 2012 and an attempt by the Central Bank to merge it with neighbouring Naas Credit Union was met with fierce local opposition.
But, how is the movement nationally? Is it viable? And, most importantly, how safe is it?
I am a member of a credit union. Are my savings secure?
Any person with savings up to €100,000 is automatically guaranteed by the government Deposit Guarantee Scheme. Members of branches that are affiliated to the Irish League of Credit Unions will also have the guarantee of the League’s Savings Protection Scheme.
So the ILCU has it’s own fund for bailing out troubled branches?
Because each individual credit union is an entity of itself, there is no central reserves the way a bank would have. That means that one branch being hit wouldn’t necessarily hit all other branches. But, it also means that there are stronger institutions and weaker ones. The SPS was established to create a pool of money for troubled credit unions to have at their disposal, should the need arise.
So why didn’t they use this fund to fill the gap in Newbridge?
This is a crucial point.
Newbridge, along with 11 other credit unions, are not affiliated to the ILCU. Instead, they are members of CUDA, the Credit Union Development Association. This breakaway group would not have the cumulative resources needed to plug the €54 million gap in the Newbridge balance sheet.
Who is to blame for what happened at Newbridge?
It depends on who you ask.
The former directors blame the Central Bank’s decision to install special manager Luke Charleton on them for creating a run on their savings, draining reserves and inhibiting lending.
The directors also claim that a revision of bad debt provisions meant that they suddenly had less than they were legally obliged to in reserves.
The Central Bank, through one message or another, says that the credit union was heading for failure had they not stepped in.
Newbridge also had a dispute with the Central Bank over the valuation of their building, which is something many credit unions are reporting. The difference arises in a technical valuation for buildings and sees the valuation differ depending on what way it is calculated.
That building has become the subject of much dispute. The Newbridge offices are eye catching to say the least. It is easily the dominant building on the town’s main street and cost in the region of €16 million.
Now that things have gone badly, there are questions over how appropriate that spend was.
So what happens to the building and the staff?
As is, Permanent TSB will run the business as normal for the time being.
Presumably that is until they work out just what they are doing themselves. The Newbridge deal seemed, from the outside at least, to happen quite quickly. That would mean PTSB has to come up with a plan.
Most likely, they will absorb the business, take on some of the staff and the building will be sold by a liquidator.
Some local suggestion is that there is interest in the building, but nothing has been confirmed as yet.
Is or was the credit union as a whole involved in reckless lending?
Generally, no. But there are exceptions.
There have previously been reports of business, agriculture and development loans in the six figures, but across Ireland the average credit union loan is just over €7,700.
They remain predominantly in the market to lend individuals for cars, holidays and home improvements.
That said, at Newbridge 26 loans average €550,000 and the largest was for an eye-watering €3.2million.
The term “acting like a hedge fund” has been used to describe the situation at Newbridge, implying that lending to members for use in businesses and development was going on.
Who regulates the industry and how did they let this happen?
The Central Bank has a Registrar of Credit Unions.
The industry, like much of the financial sector had an air of light-touch regulation in the last decade.
Permissive lending was the way of the Celtic Tiger and Newbridge has fallen victim to liberal lending policies and the downturn.
Why were there protests?
The credit union has long been an integral part to local economies in Ireland, particularly in rural communities. The idea that members own it, that it exists for the betterment of the community is holds a powerful resonance.
The Central Bank has shown no real truck with that sentiment, regulating financial institutions the same across the board. The regulators fear contagion and one credit union’s problems spreading, so they are acting fast to deal with troubled branches.
Protesters say that that action is too heavy-handed and many don’t want to be customers of a bank, much less one that received a state bailout itself.
Many see being a member of a credit union as a concious effort to not be a bank customer and feel comforted by the fact that the credit union is beholden to them as members and not shareholders.
Could this happen again?
In all likelihood, more credit unions will be forced to change operations, but over the next 10 years and in a much less painless way as Newbridge.
That means that if they don’t close, they will merge with stronger institutions. This is not necessarily a bad thing, if it creates a viable entity going forward.
All indications indicate that there is no liquidity problem in the movement.
The Central Bank has 100 credit unions on a “watchlist”, but this goes beyond bare cashflow. These credit unions have difficulties ranging from regulatory issues to numbers of board members.
Generally within the movement, which has about €13 billion in assets, many feel that the worst cases have been dealt with, with the Tánaiste confirming that the capital shortfall in credit unions is around €11 million.
While that might sound like a large figure, there is nearly 400 individual credit unions in the state and these are backed up by €500 million in government funds and the ILCU’s SPS fund.
What should I do as a member?
Become interested in what your credit union is doing.
Pay attention to when the AGM is on, go and ask questions. Read the annual statements. Pay attention to your credit union’s statutory reserves.
It is your money and it is in your interests to know what is going on and why.