Regulator sees 'no rationale' to change credit union reserve requirements

Calls for changes to be implemented to allow credit unions to snap up a greater portion of the lending market, particularly when it comes to mortgages

The value of credit union mortgages issued surged 71% in annual terms to the end of March and the credit union mortgage loan book surpassed €500m for the first time, according to ILCU Picture: Leah Farrell/Rollingnews.ie

The Central Bank said there was no rationale for credit unions to use capital buffers, which would boost reserves and possibly lead to an increase in lending by the member-owned financial institutions.

The current reserve requirement for credit unions is non-risk weighted, unlike traditional banks, but some have called for changes to be implemented to allow credit unions to snap up a greater portion of the lending market, particularly when it comes to mortgages.

Chief executive of the Credit Union Development Association Kevin Johnson said the regulator’s view was “disappointing”.

“That said, we look forward to working with the CBI on their ongoing lending framework review and the associated liquidity regulations,” added Mr Johnson.

Mr Johnson said a “one-size-fits-all regulation approach damages both large and small credit unions”, as some of these organisations have larger lending potential.

“A new model is required for the sector to sustain and achieve its full potential,” he added.

In the International Credit Union Regulators’ Network Peer Review Report on the Central Bank’s performance of its regulatory functions in relation to credit unions, the financial watchdog reiterated its view that credit union reserves should not change to a risk-weighted approach due to the limited sources of reserves, which come from earnings only, and the need for individual credit unions to have the capacity to absorb potential losses.

Credit union lending is predominantly done through variable rates which currently mitigates against interest rate risk. However, credit unions do not currently have significant fixed rate loans.

Meanwhile, overall lending among credit unions swelled in the first three months as the member-owned financial institutions continue to push into the mortgage market, which remains dominated by the three main banks operating in the Republic.

The Irish League of Credit Unions (ILCU) said overall lending had jumped by 13.6% in the period, compared to the same period a year earlier.

The value of credit union mortgages issued surged 71% in annual terms to the end of March and the credit union mortgage loan book surpassed €500m for the first time, according to ILCU, which added the organisation was on target to reach €1bn over the next two years.

ILCU, which represents more than 90% of the total active credit unions in the Republic, said its members issued about 90,000 loans from January to March.

ILCU proportion of the overall mortgage market is still relatively small.