Credit unions today are facing significant financial challenges. The combined impact of regulatory changes and the economic aftermath of the COVID-19 pandemic has led many into a state of reduced profitability. One solution that is emerging as a potential game-changer for credit unions is the adoption of a Centralised Treasury Operation.
To illustrate, a centralised treasury system can address current inefficiencies in investment and lending practices, and can significantly improve profitability. By analysing current trends, regulatory constraints, and potential benefits, we aim to provide a clear perspective on why and how centralising treasury operations can be a transformative step for credit unions.
The Present State of Credit Unions
Credit unions are currently navigating a challenging financial landscape, marked by concerns raised by former regulators e.g. Patrick Casey about their slide into aggregate loss-making. This trend underscores the need for improved credit risk management and profitability restoration across the credit union movement.
The COVID-19 pandemic has further strained this situation. Its adverse effects on credit risk and lending activities have significantly slowed down the path to profitability for credit unions. This period has highlighted the necessity for credit unions to explore new avenues beyond traditional lending to regain financial health.
One critical area requiring immediate attention is the management of credit union investments. With total savings approximating €21 billion, and only a fraction of that 27% being actively lent, a large portion of these funds remains un-lent and under-invested. This scenario presents a missed opportunity, as these funds could be more profitably invested.
The Untapped Potential of Credit Union Investments
A critical issue in the current financial landscape of credit unions is the substantial amount of unutilized funds. Of the approximately €21 billion in total savings within the credit union movement, a significant portion, about €15 billion, remains un-lent. This situation represents not just a missed opportunity for income generation but also highlights a key area for strategic improvement.
The underutilisation of these funds has broader implications. A large part of this un-lent capital ends up in banks, which then use it to offer profitable lending services such as car loans, SME loans, and mortgages. This indirect support to their competitors puts credit unions at a disadvantage, especially when they are subjected to zero or low-interest rates on their deposits. It's a cycle that not only diminishes potential revenue streams for credit unions but also strengthens the financial position of banks.
Addressing this challenge is essential for credit unions to regain financial stability and improve profitability. A strategic shift is needed in the way credit unions manage their investments. Instead of allowing their funds to bolster the banking sector, credit unions could benefit significantly from a more dynamic and centralised approach to investment management. Such a shift could transform these un-lent funds from a static resource into a powerful tool for financial growth and stability.
Perceptions Among Credit Unions
Despite the clear financial benefits, not all credit unions are aligned on the urgency or the need for centralised treasury operations. This division largely stems from varying levels of profitability and size. Many of the larger, profitable credit unions do not perceive an immediate necessity for such a system, given their current financial standing. Conversely, smaller credit unions, while also hesitant, might not fully grasp the potential benefits a centralised system could bring to their operations.
This diversity in perception is a significant hurdle in moving towards a collective approach. For some, the concept of a centralised treasury is clouded by misconceptions regarding autonomy loss or increased complexity. Others might be wary due to a lack of understanding of how such a system could enhance their investment returns and overall financial health.
Addressing these misconceptions is crucial. It involves informing credit unions about the collective benefits of pooling resources, the potential for better investment returns, and improved risk management. A centralised treasury operation is not just about individual gains; it's about strengthening the entire credit union movement, allowing for better resilience against financial challenges and enabling a more competitive stance against larger banking institutions.
The Case for a Centralised Treasury System
The adoption of a centralised treasury system in credit unions is not just a strategic alternative; it is arguably a necessary evolution in response to current financial challenges. This system offers several tangible benefits that align with the cooperative ethos of credit unions and address the issues outlined in the previous sections.
Key Benefits of Centralisation:
Enhanced Investment Returns: A unified approach allows for pooling resources, enabling access to a broader range of investment opportunities. This can lead to higher returns, via centralised credit union investments, measured here at 2%pa, including cost savings on current management arrangements, and a substantial improvement on current returns.
Improved Risk Management: Centralising investments under a single, expertly managed system enhances risk assessment and management capabilities. This aligns with regulatory expectations and provides a more stable financial environment.
Operational Efficiency and Technology Integration: Streamlining operations through systems like Oracle, Fiserv, and Kyriba reduces administrative burdens. These technologies offer sophisticated tools for managing investments, improving both efficiency and decision-making processes.
Economies of Scale: By pooling their funds, credit unions gain more negotiating power and better terms in investment markets, leveraging economies of scale to their advantage.
Strategic Financial Planning: Centralisation facilitates a more strategic, long-term approach to managing assets, ensuring that investment decisions align with the overall goals of the credit union movement.
Incorporating a centralised treasury operation requires a cultural shift within the credit union community towards collective action. It involves not just technical changes but also a rethinking of investment strategies in line with the cooperative principles of credit unions. The success of this initiative depends on credit unions' willingness to adapt and embrace a system that promises greater financial stability and enhanced member services.
The centralised treasury system is one conspicuous option for consideration. Finalysis has and continues to explore other positive alternatives with the authorities.
As we've explored throughout this post, credit unions are at a pivotal juncture. Facing financial challenges and regulatory constraints, it's clear that a strategic shift is needed to ensure their long-term viability and success. The implementation of a Centralised Credit Union Treasury Operation stands out as a promising solution.
A centralised treasury operation offers numerous advantages, including enhanced investment returns, better risk management, operational efficiency, and strategic financial planning. By pooling resources and leveraging collective strength, credit unions can significantly improve their financial performance and competitive position.
It's time for credit unions to consider the transformative potential of a centralised treasury operation. This approach is not just about individual benefits; it's about strengthening the entire movement. We invite credit unions, regulators, and stakeholders to engage in dialogue about this huge opportunity. By working together, the credit union movement can navigate current challenges and emerge much stronger.
As the financial landscape continues to evolve, credit unions must be proactive and innovative. This aspect will be the subject of a further article when current discussions are progressed. Embracing a centralised treasury operation must be a key step in adapting to new market realities and securing a prosperous future for the movement.