The Central Bank is “willing to consider” amending long term lending limits for credit unions, but has expressed heavy criticism of the sector’s regulatory compliance.
“Regrettably, standards of regulatory compliance are still well below those required to credibly safeguard members’ funds and position credit unions to tackle business model development,” the bank’s registrar of credit unions Anne Marie McKiernan has said.
“We are still seeing an unacceptable number of credit unions failing to display strategic understanding and good governance.
“In several cases, we have encountered limited financial skill sets and weak management; poor systems of control; weak risk, compliance and internal audit functioning; and weaknesses in credit practices.
“For example, we encountered several cases of problems with the most basic financial requirements, including bank reconciliations.”
Ms McKiernan, who was speaking before the Oireachtas finance committee, was asked to quantify how many of the State’s 281 active credit unions have issues of this nature.
“Our view and picture of the standards is an evolving picture,” she said. “I’m not going to give a particular figure because it changes with all the engagements, and that changes every day.”
However, Ms McKiernan said the average loan to asset ratio (the total loans outstanding as a percentage of total assets) among the State’s credit unions currently stands at 27 per cent. This is down from 49 per cent in 2007.
A report by the Credit Union Advisory Committee, chaired by Donal McKillop, a financial services professor at Queen's University Belfast, said the loan to asset ratio should be about 50 per cent.
Ms McKiernan said almost a quarter of credit unions currently have a loan to asset ratio of less than 20 per cent.
Separately, Ms McKiernan said the regulator would be “willing to consider” amending long term lending limits for credit unions. The McKillop report recommended a full review of the rates.
“There has been some criticism that the Central Bank holds back development,” said Ms McKiernan. “We disagree with that.
“Firstly, the reality is that we have not received any applications or proposals for long term lending that are sufficiently well-structured and have sustainable aims.
“We engage extensively with the sector, in different fora, to better understand long term lending aims, and to ensure that evolving proposals address potential investment costs; projected impact on return on assets over time; shared services arrangements for costs and capabilities; the changed funding arrangements needed to manage the longer term risks; how to manage collateral and legal aspects; and meet the evolving regulations, both domestic and international, that consumer mortgages require.
“We are willing to consider amending the long term lending limits. But we require clarity on credit unions’ plans for prudently developing longer term lending, addressing the points above.”
Ms McKiernan said mortgage lending would be restricted to the “most capable and financially-sound credit unions” before extending further.
“Given the sector’s current capabilities, any increase in mortgage lending would be likely to require changes on funding maturity, to deal with balance sheet risks,” she added.
Earlier, Des Carville, head of the shareholding and financial advisory division at the Department of Finance, told the committee there was a "persuasive argument" that credit union lending limits constrain upfront investment.
“It is clear that credit unions can provide mortgages to members, and many do,” he said.
“However there is a persuasive argument that the lending limits constrain upfront investment and this will form part of the implementation group discussions around Section 35.”
