Collapse of credit union was just days away

Q. What’s the background to the takeover of Newbridge Credit Union?

A. There were concerns as far back as 2007 about the level of bad and doubtful debts at the credit union and they continued to grow until in Jan 2012 the finance minister stepped in to appoint a “special manager” to run the institution and report on its problems.

Q. How serious were those problems?

A. The figures tell a grim story. In Sept 2008, it had loans to members totalling €145m and had made a provision of €5m to cover loans unlikely to be repaid. By Sept 2011, that provision had been increased to €40m. It is now expected that just €50m in loans will be repaid. During the same period, total members’ shares [savings] fell by more than 20% from €190.5m to €152m and in recent months members were withdrawing money at a rate of €76,000 a day.

Q. Where was all this heading?

A. For a painful collapse. The credit union was days away from being unable to cover its loans. In other words, it would have had to go into liquidation and members would have lost their savings.

Q. How come that didn’t happen?

A. The Central Bank had been working on a rescue plan for the credit union for the past two years and was expecting to oversee a merger of Newbridge with its financially stable neighbour, Naas Credit Union. Naas were going to get a €69m injection from a State-funded rescue kitty to cover the Newbridge losses. But Naas notified the Central Bank late last week that it no longer wished to proceed with the move. The Central Bank approached the main banks to see if any of them were interested in stepping in and Permanent TSB agreed.

Q. What are the details of the takeover?

A. Permanent TSB takes over the loan book, including both good and bad loans, and will get a €54m injection from the rescue fund [it sought less than Naas] to help cover the losses. It will, for the time being, run the credit union business exactly as before, out of the same premises and with the same terms and conditions for savers and borrowers. The only thing left belonging to the credit union is its building — now valued at about €3.9m when it cost €15m. A liquidator will be appointed to sell it and after that, the business is likely to move to Permanent TSB’s branch in Newbridge.

Q. Why did things go so wrong for Newbridge?

A. The Central Bank found glaring failures in the way loans were handled. According to the affidavit prepared for the High Court application to approve Permanent TSB’s takeover, there was a failure to determine borrowers’ financial position or their ability to repay, an absence of a consistent loan application process, inadequate documentation of loans, a failure to consider what other loans borrowers might have with the credit union and a failure to regularly assess how loans were performing.

Q. How did this manifest itself?

A. In hugely generous/reckless lending. In Dec 2011, the average loan to a member was €17,281 compared to the average credit union loan nationally of €7,764. There were also 603 “special examination loans” which were exempt from the normal credit union rules and these amounted to €40.3m. Among them were 26 loans with an average size of €550,000 and one was for €3.2m — way outside normal credit union business.

Q. What happens to those who were in charge while this situation developed?

A. The management and board of directors were replaced by the special manager in Jan 2012. They are not subject to investigation or enforcement proceedings as the Central Bank did not have powers of this kind during the period in question. A new regulatory framework and “fitness and probity regime” for credit unions, including sanctions, only came into effect on Aug 1 this year.

Q. Is everyone happy with the takeover?

A. The Save Newbridge Credit Union Action Group is opposed to it and is talking of legal challenges, although the Central Bank says the legislation is watertight and the takeover cannot be legally reversed. The Central Bank wasn’t thrilled to go down the bank route either as it would have preferred a credit union merger/takeover. Ordinary members have seen no changes to their dealings with the credit union yet.

Q. Are other credit unions heading for trouble?

A. Around 100 credit unions — about a quarter of the total — are under asset review by the Central Bank and weaknesses are being unearthed but their difficulties are far less serious than Newbridge, and it has been stressed that the Permanent TSB takeover is not a template for resolving problems in other credit unions. However, about 20% of all credit union loans are in arrears so we’re likely to see some mergers and other calls on the rescue fund.

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