Credit Union task force needed to solve the crisis

Poor governance and failure to modernise has landed many credit unions in hot water, writes BILL HOBBS

WITH at least e1.1 billion of impaired assets, credit union boards have only themselves to blame for balance sheets primed with risky loans and illiquid risky investment portfolios.

When governed and managed prudently, as many are, the co-operative savings and loans business is a resilient banking model.

But after a decade of poor governance and failure to modernise, credit union boards have sailed far too many credit unions into a perfect storm as bad debts escalate, investments implode and cash runs dry.

In the teeth of the storm, the Irish League of Credit Unions (ILCU) emergency rescue system, called the “savings protection scheme”, is coming under increasing scrutiny.

Credit union members now realise how poorly governed and managed many credit unions are and wonder if their credit union is safe. Many are not as safe as they should be. Their members should not be put off by activists’ rather lame “global crisis” excuses or “voluntary status” special pleading, but should ask one revealing question: Will their credit union be able to pay any dividend later this year?

Hundreds of millions of community capital has been squandered in stock market investments that should never have been made. Many credit union boards consistently ignored professional and regulatory advice, favouring their own misguided view of what a financial co-operative should and shouldn’t do. Far too many directors cede control to two or three colleagues, with many boards controlled by dominant personalities found in all voluntary associations.

In a recent survey seven in 10 credit unions said that the required skills set of the board and credit union had little or no relevance in their director selection process.

Nearly two thirds had no training or orientation programme, eight out of 10 directors had no consumer or commercial lending skills, over half had no financial services management skills, with a third having no accounting skills and six of 10 no marketing skills.

In another survey over half said they had no succession plans, board turnover was very low and only slightly over a fifth had a business plan in place.

The ILCU almost exclusively represents a traditional voluntary director view of credit unions.

In doing so, it maintains credit union members are not customers, has lobbied against a state guarantee for savers and is, it seems, frustrating the introduction of a voluntary consumer protection code.

It’s a system of governance that bears significant responsibility for investment losses as its policy actively promoted and persuaded credit union boards and management to invest in products they should never have invested in.

After new investment rules were introduced by the regulator in 2006, it took care to point out they were not mandatory. Many boards and management subsequently ignored the rules and chose not to unwind from high risk investments. In one typical case, a leading credit union’s 2008 accounts show that e23m of its e43m investment portfolio remained exposed to equity and bond markets last September.

The ILCU appears to have applied its policy to its credit union bailout fund including investing in perpetual bonds. The fund, which lost e5.7m last year, appears to have approximately e110m, but its structure and liquidity or immediate encashment value is uncertain.

Last December it listed e32.9m in “held to maturity assets greater than one year” and about e16m in shares, securities and unit trusts. Its accounts do not state what these assets comprise of nor is there any information on its overall liquidity profile which is crucial to understanding how financially supportive any fund can be.

Following recent statements made in the Seanad — questioning the scheme’s structure and financial capacity to provide assistance — the ILCU has a job on its hands to convince its member credit unions it has the financial muscle to provide the support required.

More embarrassingly for it, at least one leading credit union is charging the cost of its annual contributions to the fund directly to its customer’s savings accounts.

Meanwhile, in the absence of a reliable emergency support system and heightened public concern for credit unions, Finance Minister Brian Lenihan must rely on advice from his Credit Union Advisory Committee.

This is a statutory committee of seven people, comprising in the main voluntary directors. But it appears the minister’s hands are tied as he cannot act until he has been advised by this group.

Navigating credit unions to safer waters will take more than the existing voluntary based structures. It is time to establish a credit union task force and empower it to take the urgent action required.

Bill Hobbs is a banking commentator and former head of business strategy at ACC Bank