Central Bank accused of unjust regulations on credit unions

Credit union chief executives have recently criticized the Central Bank’s regulations on the sector, calling them “excessive and unjustified”. After conducting research, a group of CEOs from credit unions across Ireland, chaired by Queen’s University Belfast professor Donal McKillop, have claimed that under the Central Bank’s current regulations, Irish credit unions are forced to set aside unjustifiably high levels of their capital into reserves, much higher than that of Irish and European banks.

Under the Central Bank’s current rules, credit unions must set aside a minimum of 10 percent of their total assets in reserves. This means that when a credit union member saves €100 with a credit union, the credit union must then put €10 in its reserves, if a member saves €1000, the credit union must put €100 in reserves, and so on. In its research paper, the Credit Union CEO Forum deemed these rates “excessive” and many credit unions have put limits on amount of savings they will accept from members, with some capping savings at just €10,000.

The CEO Forum’s paper states that these reserve capital requirements are excessive compared to the risk profile of Irish credit unions. The Forum reasons that, because most of the savings in credit unions end up in low risk investments like Central Bank accounts, government bonds, or mainstream banks, their capital reserve rates should be more comparable to competing financial institutions. The paper also says that the level of capital held by credit unions is much higher than Irish and European banks, as the forum has calculated the actual reserve ratio for credit unions at 17 percent, much higher than the 10 percent minimum. This 17 percent ratio is enormous when compared to the average of 9.6 percent for banks in Ireland, and other European countries such as the Netherlands, where the rates can be as low as 4.8 percent.

The disparity in ratios between banks and credit unions continues to be shown when mortgages are brought into the picture. The paper reports: “The average capital requirements for European bank mortgages are 2.1pc; it is 5.7pc for Irish bank mortgages, while ratios of between 10pc and 12.5pc plus an operational risk reserve apply to Irish credit union house loans.” This is surprising when considering that credit unions in Ireland are excluded from riskier mortgage options like buy to lets and investment properties.

The Central Bank said in return that adequate reserves are essential to support credit unions’ operations and encourage growth, as well as providing protection against unforeseen losses. The Central Bank also said that regulatory change is not the answer to the credit union sector’s challenges, so it does not appear that the Forum’s research paper  will bring about any change in regulations anytime soon.

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