WHETHER Newbridge Credit Union is an isolated example of a rogue institution in a relatively stable sector, or whether it is symptomatic of a much wider malaise is possibly a multi-billion euro question.
The Government and the troika will be hoping that it is the former. The markets will be looking on with keen interest. In view of the timing, the stakes are extremely high.
The Central Bank has a €250m fund in place to deal with credit union loan losses. Losses at Newbridge have already accounted for €53m of this fund.
There are 403 credit unions dotted around the country with total assets of €13,783.62m according to a Central Bank report released in March 2012. If Newbridge is representative of losses lurking in the sector, then the country’s credibility would take a severe hammering as the economy is freed from the shackles of three years of troika supervision.
However, it would seem that Newbridge did have an exceptional set of circumstances. Whereas the average loan across the credit union sector is €7,500, in the Newbridge branch it was €17,200. Moreover, it had exposure to a significant amount of local property development.
Of the €40m of property related loans on its balance sheet, €24.6m are considered to be seriously distressed.
Long-time investors in banks have a general rule of thumb: if a bank moves into a shiny new headquarters and buys its own private plane, then it is time to sell its shares. The rationale is the chief executive and board are more worried about image and scale than the nuts and bolts of what should be a very conservative business model.
Newbridge did not buy its own private jet, but it did have a shiny new building that was valued at €15m at the height of the boom. Its current value is €3.9m, which has obviously depressed the value of its assets.
The Government was faced with either writing a cheque for losses at Newbridge to facilitate the transfer of 32,000 deposit accounts and 7,000 loan accounts to Permanent TSB.
Its options were very limited. Credit unions are not banks. The reason the country was forced into an EU/IMF bailout in Nov 2010 was largely as a consequence of the decision to guarantee the banking system. As part of the EU banking union, in future if a bank becomes heavily loss making and needs to be recapitalised, shareholders and bondholders will get burned before depositors with more than €100,000 take a hit.
However, the credit unions have no such capital buffers. In the event of a credit union being put in liquidation, the ordinary depositors are the shareholders. But credit unions are covered by the Central Bank’s deposit insurance scheme, which means that all deposits under €100,000 are covered.
Consequently, the Government would have had to cover the cost of putting Newbridge into liquidation anyway. All that it would have achieved is create a huge amount of uncertainty across the sector and possibly cause a run on other vulnerable credit unions.
The Central Bank is currently doing a rigorous examination of all credit unions in order to discern total potential losses. It is highly likely that this review will prompt a significant amount of consolidation across the sector.
THE bad debt problem is becoming more visible now because of the Central Bank’s multi-debtor resolution framework and the new personal insolvency arrangements legislation. Credit union loans are unsecured and under both schemes they carry less of a repayment priority than mortgage and other secured loans.
The next three years is likely to see a much bigger quantum of losses flow through credit unions.
However, Newbridge throws up huge governance issues as well. It operated more like a hedge fund than a community focused lending institution over the boom years. It should never have been allowed to ramp up its exposure to the property development market.
Most credit unions serve an extremely important role in the local economy. Now that the banks are scaling back on the amount of branches that they operate, credit unions will be even more important to the older and less computer-literate members of society.
Its appeal in the past is that it was run by local people for local people. But as with all financial institutions over the boom years, the risk management and corporate governance standards fell short of what they should have been across most of the sector.
To create a credit union sector fit for purpose over the medium to long term is the key challenge.
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