Fears €1.2bn of credit union loans will be written off
The Financial Regulator’s Registrar of Credit Unions James O’Brien raised his concerns in a letter circulated to all credit unions.
In it he said the stress-testing comes against a background where all financial institutions are operating in a challenging economic environment.
“Credit unions cannot be expected to escape the adverse impact on the economic downturn. This is reflected in the sharp rise in the levels of reported arrears and the significant increase in loans being rescheduled as more and more credit unions come under financial stress. This is a matter of concern,” the letter said.
A template Excel spreadsheet file has been sent to all credit unions which must be completed and returned to the registrar via email.
Mr O’Brien said credit unions are legally bound to provide him with the necessary data by Friday, June 25.
Mr O’Brien outlines a “base case scenario” which envisages a 17.5% loan loss rate on personal loans which would result in a write-off of €1.2bn in loans by September 2012. A “downside scenario” projects a 25% loan loss, or €1.7bn, in the same period.
The registrar said the information they receive will permit the financial regulator to identify and prioritise the actions they will expect individual credit unions to take to resolve their financial difficulties and the level of regulatory response required.
The first phase of the stress testing regime asks all credit unions to categorise their loans into four separate lending categories.
Under the “base case scenario” the projected loans losses are:
- 17.5% on personal loans.
- 4.4% on mortgage/housing loans.
- 10.5% on business loans.
- 35% on development loans.
The “downside scenario” envisages loan losses of:
- 25% on personal loans.
- 6.7% on mortgage/ housing loans.
- 15.7% on business loans.
- 42% on development loans.
“In recognition of these stresses our main regulatory focus at this time is on the quality of credit union loan books and the level of bad debt provisions held by credit unions,” the registrar said.
Mr O’Brien said the full impact of the economic downturn on credit unions will only become apparent over time.
A second data collection exercise will be carried out in July.
“Once we have analysed the responses we will contact individual credit unions with details of any further actions we require credit unions to take, or any further actions we propose to take,” Mr O’Brien added.
