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.