Rules to put credit unions on secure footing

Proposed legislation from the Central Bank will introduce a raft of new rules for credit unions in the areas of reserves, liquidity and savings.

The draft legislation is aimed at ensuring the sector is put on a much more solid footing following the huge losses incurred over the past six years.

There will be a series of consultations with all stakeholders around the country over the next two weeks. Seminars will be held in Dublin, Cork, Kilkenny, Limerick and Athlone. Following this, a feedback document will be published next June with the new legislation scheduled to come into effect from the end of 2015.

There will be a series of sweeping changes to key metrics, including capital, lending and liquidity. For example, credit unions are required to maintain a minimum reserve ratio of at least 10%.

The draft rules also require newly-registered credit unions to maintain sufficient reserves to support anticipated growth and take account of expected operating losses and, “contain requirements on reserve management practices that were previously contained in guidance on the reserve management policy.” Credit unions are required to maintain a liquidity ratio of 20% of unattached savings.

The new legislation expands the assets that qualify as liquid assets to any investment with a maturity of more than three months as long as there is a guarantee that the funds can be accessed within three months. There is also a requirement to hold a short-term liquidity ratio of at least 10% of savings where short-term liquidity is defined as cash and investments with a maturity of less than eight days. Under draft lending regulations, a credit union can now make commercial loans up to a maximum of 50% of its regulatory reserve. Moreover, any commercial loan granted to a borrower or group of borrowers that are connected that is less than €25,000 will not be included in the calculation of this limit.

In the past, a large exposure limit for an individual was €39,000, or 1.5% of total assets. The large limit exposure will now be based on a credit union’s reserves rather than assets so that lending takes account of the credit union’s ability to absorb any losses that may arise from credit risk.

The new rules require that investments with a single counterparty must not exceed 25% of the total value of the credit union’s investment portfolio. Moreover, it is proposed that no investment has a maturity greater than ten years and no more than 30% of any credit union’s portfolio may be in investments with a maturity of more than seven years, and 50% of the portfolio can be in investments no longer than five years. The draft savings rules now propose that all credit unions can have individual member’s savings of up to €100,000.

There have already been a number of mergers between credit unions and more are expected.

The Government announced last February that a levy would be imposed on all credit unions to create a €30m stabilisation fund over the next six years. At the end of last December, there were 390 credit unions in Ireland with total assets of just under €14bn. Of these, 195 have assets of less than €20m; 167 have asset of between €20m-€100m; and 28 have assets of over €100m. There are 20 credit unions with a total deficit of €11m.


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