Review of the Credit Union Sector
The Registrar for Credit Unions, Anne Marie McKiernan and Deputy Registrar, Elaine Byrne appeared before the Oireachtas Committee on Finance, Public Expenditure and Reform this evening to answer questions of Deputies and Senators in relation to the review of the Irish Credit Union sector.
The session proved to be an interesting one with a number of issues explored and Ms. McKiernan giving some regulatory perspective on the ever elusive meaning of 'viability' in the context of credit unions.
Requirements for Recovery
Ms. McKiernan made an opening statement - which is worth reading - in which she identified four main requirements for sector recovery and growth, namely :
Further restructuring
Drive for new younger active borrowers
Marked increase in core lending
Business model development in a multi-step, risk-managed way
Her comments in relation to restructuring provided further evidence, if any were needed, of the Central Bank's desire to see a drastic reduction in the numbers of credit unions. She spoke of the 170 or so credit unions with very small assets sizes and the viability challenges facing these credit unions. Deputy Michael Creed (Cork North-West) put it to Ms. McKiernan that her remarks suggested a policy position in the Registry to decrease the number of credit unions significantly, which she did not deny. Deputy Creed also questioned Ms.McKiernan about the registry's vision in terms of the end-point for restructuring, and how many credit unions she ultimately saw there being once the bulk of rationalisation was complete. While she held the line that there is no particular target at the Registry, she did reinforce on numerous occasions that there is still some way to go before the number of credit unions is at an optimum level given the major issues that remain.
One Size Fits All
Deputy Pearse Doherty posed legitimate questions to the Registrar about the one-size-fits-all approach to regulation of the sector with a particular focus on the use of excessively restrictive credit risk management measures and the failure to apply risk-weighted capital requirements and tiered regulation as is done in other jurisdictions, and was proposed in the Commission Report in 2012. He emphasised that these appeared blunt regulatory instruments and suggested that the Registry was not applying a risk-based approach to regulation. Ms.McKiernan outlined that the rationale underpinning many of the requirements is proportionate to the nature, scale and complexity of the sector. She argued that the lack of complexity of the business model justified a certain approach in their supervisory role of protecting members funds and refuted that their engagement process does not take consideration of the risk profiles of individual credit unions, stating that the level of implementation of the regulatory framework expected in smaller credit unions is less than that of larger, higher impact credit unions.
She also confirmed that the Central Bank would be willing to revisit issues such as risk-weighted capital requirements and tiering if the business model develops to an extent that requires it, but that at present the Irish movement is so basic compared other jurisdictions that it would not require more complexity in terms of prudential regulation.
Viability
One committee member took Ms. McKiernan up on her comments about the sector's average loans to assets ratio falling from 52% in 2008 to 28% today, and queried what level the Registry believed indicated viability, and unusually, she actually answered, stating that long-term viability for a credit union would typically require a loans to assets ratio of at least 40 to 50%, something Boards of Directors should take note of when reviewing strategic plans and considering restructuring strategies.
She also stated that leadership is needed at sectoral level to ensure that credit unions can provide the product and service offering that will entice younger members to borrow from credit unions and address the worrying age profile in the current membership and increase core lending. In her view there exists a fundamental business model weakness that threatens the sustainability of the movement.
The strategic development of the sector and credit unions individually will be challenged by the Registry and proposals will be subject to scrutiny to ensure that all relevant risks are identified, proposals are properly costed and returns are achievable. Indeed she made reference to one example of unnamed stakeholders bringing a proposal to the registry in relation to one product/service, the Registry pointing out a particular risk, that risk subsequently arising and the approval for the proposal being refused.
Sourcing a Solution
Anne Marie McKiernan seems to be a very able and competent regulator and she appears unwavering in her approach to addressing the problems facing the sector as diagnosed by the Registry, notwithstanding the many deficiencies in the Registry's engagement with credit unions and the heavy handedness of their approach at times. She does however, contrary to perception, appear to be open to facilitating the movement in developing the business model, once that development is done in line with effective risk management.
In her concluding remarks to the committee she did state that she believed the sector could return to success and that a working credit union movement is desirable to provide choice and variety in the financial services space. Harnessing the potential of credit unions is not, however, a job for the regulator, it is the job of credit unions.
This is the challenge facing credit unions; 330+ individual , disparate, independent entities trying to agree on the time of day is difficult enough, let alone trying to agree upon a cohesive and coherent strategy for developing a sustainable business model that puts members resources to better use. High dependence on the performance of investment portfolios means that the income positions for most credit unions are extremely exposed to adverse changes in the interest rate environment. Ms. McKiernan also alluded to the increasing cost pressures that credit unions are facing brought about primarily as a direct result of regulation. Balance sheet diversification will only be possible through the maturing of the business model and this cannot be achieved until the movement is more efficiently structured, both in terms of the size and number of credit unions, and, more importantly, in terms of the overall governance model.
The reality is that restructuring for restructuring's sake alone will not contribute greatly to the development of the sector in Ireland; there also needs to be a total revamp of the governance model that exists, and that means moving from an atomised model to a federal or centralised structure. If credit unions are to truly become a third banking force in Ireland there needs to be a lean, strong core that can react to an ever-changing operating environment. At the moment movement progress seems to be at the pace of the slowest-moving credit union and ultimately it is members that are losing out.
The restrictive regulatory framework will only be relaxed once credit unions can demonstrate an ability to be masters of their own destinies, something that we are failing to achieve as a co-operative movement. Principle 9 of the Irish Credit Unions Operating Principles incorporates cooperation among co-operatives into our core values, a value that we need to bring back into focus if we are to grow as a movement and fulfil our mission. The debate has already begun about the future of the movement and it's time that we started looking at coming together in a more meaningful and structured manner. We should do it on our own terms rather than having the terms dictated to us by the Central Bank, but that's a choice we have to make.
