Current Status of Credit Unions and Need for a Centralised Treasury System
The regulator, Patrick Casey has recently expressed concern about the slide of the credit unions collectively into aggregate loss making and has added his concern about adequate credit risk management in many credit unions .There is a clear and urgent need to restore profitability for the movement at large . The Covid 19 experience has been universally bad for credit risk and for lenders and, even increasing new lending, whether into mortgages or SME loans, will be very slow to restore CUs to profitability
Credit Union Investments must be the new Focus
The Credit unions need, immediately, to focus elsewhere for profitability and the area requiring urgent attention is of course their collective return on credit union Investments .
Total savings in the credit union movement currently approximate €18billion, of which only €6bill is lent, with some €12bill un-lent. With few exceptions these un-lent credit union funds are finding their way into the banks who are ‘eating the credit union lunch’, lending those same funds profitably for Car loans , SME loans and mortgages, while the funding source , Credit Unions pay negative interest rates
Popular Credit Union Perceptions
Notwithstanding the aggregate loss of overall profitability, many of the larger credit unions are profitable and do not see an urgent need for a centralised treasury system. And many individual smaller CUs also do not see the immediate benefit of a centralized treasury system. But, in the spirit of collective responsibility now addressing global warming , the time has now come for credit unions also to think collectively rather than individually .
Current Impossibility of Raising the rate of return on credit Union investments
If the current €12billion of investable Credit Union savings is divided by the remaining 233 credit unions, it suggests an average sum for investment of some €51m per credit union. This is far too small a sum for the individual CU to invest effectively. Investment policy of credit unions have to be balanced carefully and safely between that which is retrievable on demand, that which is available in the short term, and that which is available for investment in the longer term, e.g., more than 5 and 10 years.
The only way that such a prudent spread of investments could be made across the maturities, across interest rates and investment vehicles would be by combining the full €12 Billion and administering it expertly ,centrally and prudently, by reference to market trends and to likely demands for loans within the movement itself.
CBI- Permitted Investments for Credit Unions
In the current environment with very many small credit unions and with very few credit unions having a high level of investment expertise, the Central Bank regulator has prudently restricted its list of ‘’ permitted’’ investments . These of course do not include e.g. the commercial state companies (CSCs) of the NTMA, which are currently paying relatively high rates for their €8bill funding. If these companies could be opened to Credit Unions, with their available funds, the result could be transformative .
With a Central Treasury, Credit Union, investments could earn up to ( a representative and measured) 1.1% pa. If this rate were then added to the negative interest rate now being charged, 0.65% it would amount to an improved 1.75%pa return on CU funds . And… , if , say, up to, €8billion of credit union funds were so invested it would increase the return to credit unions collectively by some €140m per annum!… enough to restore the movement to strong profitability and to transform their business abilities . The increased benefit would of course be shared pro rata by the participating credit unions
The NTMA Commercial State companies
The appeal of the NTMA companies is of course that, as corporates, they pay high rates for their funds. More importantly for the credit union comfort, they are implicitly guaranteed by the state ! (The US history of Central treasuries includes some disturbing failures due to imprudent investment risk, and even the former Irish experiment suffered from concern of such failure )
The NTMA itself
It is suggested that such a collaboration by the Credit Union with the NTMA could prove popular also with the NTMA, by providing access for the CSCs to full, keenly priced and flexible funding, whether in support of or as a partial alternative to, the more expensive and inflexible Irish bank lending .
The Position of the Central Bank Regulator
It is believed that the Central bank would see merit in such a Centralised and fully qualified Treasury operation and might well be happy to open the CSCs to CU investment, delivering clear benefits to both parties , while also securing the future of the credit union movement.
Position of the State as Guarantor of Credit Union Savings
For its part , the State would likely be pleased to see Credit Unions being restored to profitability ; after all the state has guaranteed all €18billion of Credit Union funding and it should be pleased to see any risk of individual credit union collapses being removed .
The Centralised Treasury System and the Technology
Reference to the UK and to the US has identified a number of well tested treasury systems being used by Credit unions, going back over the last 20 years , including, Oracle , Fiserv, and Kyriba . The size of the Irish operation does not challenge the scale of the systems available and the cost figures checked confirm commercial feasibility. Estimates of time to install and operate are generally put at 6 to 9 months from decision.
Ownership of the Centralized Credit Union Treasury System ( CTS)
It would be usual for the credit unions to establish and to own the CTS and to appoint staff to it .
Insofar as the participating credit unions would be relieved of treasury responsibilities progressively it would be normal to levy the modest costs of the CTS over those credit unions, being fully compensated by the increased investment returns.
Investment Strategies Generally Costs and Credit Union operating efficiency
Investment decisions and policies would normally be determined by the CUs at large, or possibly up- front by the ILCU.
Credit unions would then be relieved of a very specialised activity for which they are not currently well equipped and investment costs and current risks would be eliminated.