We have noted previously the compounding pressures on many credit unions arising from reduced borrowing and increased savings during the pandemic period, and we will be publishing our research on how credit unions are responding very soon. In the meantime, the Credit Union CEO Business Model Development Forum in Ireland has produced an excellent new paper that offers a critique of the Irish capital requirements regime for credit unions. Regulatory Capital for Irish Credit Unions: Time for Change? by Séan Murray, Lorraine Greville and Michael Ahern contends that this is “excessive and unjustified relative to the risk profile of the Irish credit union balance sheet, international credit union requirements and the requirements on competing financial institutions”.
The authors note that recent growth in assets has been predominantly savings, so the asset base of the movement is actually lower risk than it was when the 10% requirement was introduced in 2009. There is a 10% requirement in Britain for the largest credit unions, but also a 2% ‘buffer’ for extraordinary impacts (such as a pandemic). Credit unions in Australia, Canada and the US are required to hold a capital to asset ratio of between 3% and 6%, despite their higher loan to asset ratios.
After reviewing the Irish credit union sector’s balance sheet and ratio indicators, the demands on Irish banks asnd ,the regulatory approaches to credit unions in other countries, and a discussion of asset-linked capital requirements, the authors conclude that “the introduction of asset linked ratios to calculate capital requirements will result in a more rounded, risk conscious and ‘fit for purpose’ credit union operating model.”
For British credit unions, the capital requirements are on the whole a less critical contemporary issue than the constraints on where credit unions can invest un-lent liquidity for meaningful returns or productive use. CFCFE has commissioned further investigation of this important topic for later in the year.
