Uachtaran na hEireann, ladies and gentlemen. Good morning and thank you for the invitation to speak at your Annual General Meeting. This year marks a major milestone in the credit union movement in Ireland – the 50th anniversary of the signing into law of the 1966 credit union act by the then President, Eamon de Valera. It is fitting that our President, Mr Michael D Higgins, is honouring the credit union movement by addressing your conference today.
This morning, I would like to take a few moments to look back at the start of the credit union movement in Ireland; to reflect on how far your sector has come since – especially through the financial crisis and its aftermath – and highlight the special role which you occupy in the financial system and society. I will outline the special challenges which your sector faces at this time, which arise from the overhang of the financial crisis and the structural pressures on your sector. Then, I will set out our priorities in working with you to address these challenges, to achieve a thriving sector into the future.
1. The set up of the credit union movement in Ireland
The Irish credit union movement was founded by three dynamic, pioneering and entrepreneurial people, teacher Nora Herlihy, baker Sean Forde and civil servant Séamus P. MacEoin, as a way to help tackle the economic and social problems prevalent in Dublin in the 1950s. They were concerned about the impact of high unemployment and low and short term State benefits on the health and welfare of many families in Dublin at that time. They felt that scarce availability and poor management of money contributed to the problems faced by many families.
Their vision was that credit unions would provide people with a way to better manage their money and give them access to inexpensive credit when they needed it. Each credit union would be owned by its members, who would use their pooled savings to lend to each other at a fair and reasonable rate of interest. Their concept of financial self-help grew enormously in popularity, from 3 credit unions with 200 members in 1959, to 434 credit unions with 1.7 million members 20 years ago, with membership rising since to 3.1 million people. Today, 333 active credit unions hold €15.2bn in assets, €12.7 bn in savings and €4bn in loans. Collectively, they account for 1/8 of Irish household savings and 1/4 of non-mortgage personal loans in Ireland.
There is no doubt that credit unions have a special place in the financial sector and in communities across Ireland. For over a half-century now, you and your colleagues have been serving your members with drive and determination, as you strive to continue to uphold the principles and aims of those early pioneers of the movement in Ireland. The credit union movement has been, and continues to be, a catalyst for greater financial inclusion; it encourages a savings culture and provides access to financial services and products for those who may face barriers elsewhere. The qualities of entrepreneurship and drive for change, that characterised the pioneers of the movement, are needed today to deal with the sector’s challenges. These, combined with the extraordinary commitment of the professional and volunteer staff and Boards of credit unions, will provide the basis for a continuation of your sector’s special place in society and the financial system.
2. Financial and economic crisis and aftermath on the credit union sector
Along the way, credit unions have weathered significant storms, none more so than the financial crisis and economic downturn which threatened the stability of the credit union sector and the Irish financial system more broadly. But, while credit unions appeared to emerge from that crisis in better shape than feared, the sector was nonetheless severely impacted, including from pressures on members’ repayment capacity due to job losses and pay cuts, write-down of property investments (including overexuberant development of some credit unions’ own premises), and poor lending decisions which led to significant write-offs.
But a worse crisis was undoubtedly avoided, and while there were many and complex reasons for this, it is worth reflecting on some of the contributing factors :
- confidence and loyalty of your members in your credit unions, which meant that the risk of broader savings withdrawals and associated illiquidity was avoided, apart from a few cases. This member confidence and resilience of members’ funds – throughout the crisis period and since – were undoubtedly boosted by the extension of the deposit guarantee scheme to credit unions in 2008, which then – as now – protects members’ funds up to €100,000. And liquidity risk was further mitigated by introduction and bedding in of liquidity requirements from 2010. Also, sensible decisions by many credit unions to improve their financial resilience by increased provisions and decreased dividends were rewarded by credit union members staying loyal, even while the return on their shares declined;
- the evolution of arrears and defaults in credit unions, where losses were substantial but still less than feared, as households and small firms focused on repaying short term credit union debt, to keep finance flowing at a time when access to other financing – particularly from banks – was severely hampered. Nevertheless, arrears and bad loans still reached unacceptably high levels and, while on a reducing path, arrears are still worrying high at 12.8%;
- the package of regulatory measures, designed to reduce balance sheet, governance and management risks and vulnerabilities in credit unions. These included the financial requirements (liquidity and regulatory reserves, long term lending limits and lending restrictions) and, later, new governance and management requirements, to ensure that credit unions would be better run and better able to protect members’ funds and the future stability of their business;
- restructuring and resolution. The Central Bank’s resolution actions removed a number of failing credit unions, with no loss of savings to any member, and helped stem possible confidence and financial stability risks. While voluntary mergers were slow to gain hold, the extent to which restructuring has been embraced in recent years – thanks to the combined efforts of the Restructuring Board, credit union managers and boards and the Central Bank – has been vital in giving the best chance of future viability for many credit unions and provided a basis for expanding services for members.
These are, of course, only some of the many aspects which saw the credit union sector emerge burdened, but unbowed, from the worst period of the Irish financial and economic crisis. Reflecting on the avoidance of a much worse outcome can seem like a negative view of the world. But, in fact, it offers the opportunity to draw lessons that can be used to better deal with the different challenges ahead. What are those major lessons?
- Confidence and loyalty of your members is remarkable and a major asset to your sector. This comes with the responsibility on credit unions to ensure that they are well run – financially and operationally – to safeguard those members’ funds. Our regulatory framework sets the standards in this regard, and are proportionate for the nature, scale and complexity of your sector. We are seeing improvements in the ability and intent of credit unions to meet these appropriate standards, but there is still some way to go to be at the level that best protects members’ funds and puts the sector on a solid future footing. Our review of lending restrictions last year indicated that many credit unions were making important efforts to meet requirements on credit risk management – a core responsibility of any lending body. But 95 lending restrictions remain in place today, either because credit unions were unable to demonstrate, or did not make a case to show, that they meet appropriate requirements. That is not a position which developmentally-minded and member-focused credit unions should be willing to accept . And it is not one that any Regulator would accept either. We are proactively following up with those credit unions who failed to demonstrate, through the lending restrictions review, that they can and will meet our proportionate requirements on credit risk management. Recent changes in our regulatory framework are also specifically aimed to reduce the prospect of, and the possible risks from a materialisation of, changes in confidence or illiquidity in the sector – these include the short-term liquidity requirement in our latest regulations, and the cap on savings of €100,000.
- Crises and their aftermath have a way of diverting attention from other, apparently less pressing but no less serious issues. The focus, time and effort of dealing on the ground with the impact of financial crisis on credit union business, and at the same time embracing a changed regulatory and supervisory framework, were rewarded by preventing worse outcomes and getting the sector back on the right footing. But the demands of the crisis did divert attention from the underlying structural problems of the sector. These structural issues include the need to address your ageing active membership base; your ability to grow lending prudently and also to transform the business model to provide the products and services that new, younger members expect via the channels they require.
3. Structural challenges
Of course, it is easy to call out these structural challenges, and I acknowledge that it is very difficult to deal with them. But that doesn’t change the need to now turn your focus, effort and sectoral leadership towards three key requirements :
- Deriving benefits from sectoral restructuring. Transfers are a necessary – but not sufficient – condition for addressing financial and operational weakness and giving credit unions the capability to transform the business model. From 333 active credit unions today and based on projects notified to ReBo by 31 March, the number may be closer to 280 credit unions by end-2016. This is a sizeable change, and I want to acknowledge the huge effort across the sector to safely conduct this large number of transfers while ensuring continuation of services to your members. But embracing and undertaking join-ups are “Phase 1”. “Phase 2” represents the more challenging and important phase of realising benefits from transfers. Greater financial and operational strength of merged entities is needed to deal with legacy financial burdens, grow lending and take on business model development in a proportionate way. As yet, however, we are seeing few signs of real benefits emerging from restructuring, although I acknowledge that there are different paces of change among credit unions in the post-transfer environment. I urge all credit unions, who have undertaken or are involved in transfers, to keep focused on the strategic opportunity of restructuring. An area of focus for the Registry’s onsite supervisory engagements in 2016 is to understand how post-merger credit unions intend to leverage off increased capacity to address cost efficiencies, lending growth and business model development;
- Attracting and retaining active borrowers is the key requirement for grow lending responsibly. I acknowledge that growing lending again in a broad-based way, and sufficient to reverse the declining loan-to-asset ratio of the sector (now 27% and on a falling trajectory since late last century) is no small order, especially in the environment of deleveraging in the wider financial sector. But we are seeing some credit unions show dynamism and innovation in building their active membership base and extending their business offerings without significant investment, and this is a welcome development. Your sector enjoys a very trusted brand and member loyalty, and these provide a very strong basis on which to build a better future around member and services growth and lending opportunities, while pricing appropriately for risk and offerings.
- Business model transformation, via structured responses that build on the current realities of the sector – including competitors and risks – and take it forward in a multi-step, well-managed way. Here, the key requirement is for the sector to set out its vision of what is appropriate and feasible, and a plan to get there. Clearly, this calls for leadership at the sectoral level. We at the Registry engage actively with sector representative bodies and other stakeholders on this issue. Our focus is to hear your views on where the sector is moving; provide information on what is required to take possible proposals forward; understand the impact of the regulatory framework on business model development, and challenge proposals for improvement.
As you reflect the scale of change embraced by your volunteer-led movement, and the improvements which have been achieved, particularly over the difficult past decade, it is a significant achievement. An important factor, in moving from crisis to stabilisation to potential recovery, has been the substantial efforts of your board, management, staff and volunteers, to address the very significant problems that existed and to steer your credit unions through the choppy waters into a calmer sea. Now, the challenge is to marshal efforts for the next phase, for the different challenges, but where the reward will be a revitalisation of your sector. The current economic expansion provides some breathing room for dealing with financial weaknesses and attempting prudent expansion, but cyclical improvements should not disguise the need to take more comprehensive action on structural weaknesses.
The prudential decisions we in the Registry have taken are designed to ensure that credit unions are more robust and viable and therefore better able to serve their members needs and deal with future challenges. As well as the regulatory measures I mentioned earlier, we also used extensive onsite engagement with the sector to bring a focus to strategic planning, governance, risk management and controls, and we required remediation actions to be prioritised to best safeguard your members funds. While standards of regulatory compliance are, in general, rising, it is important to emphasise that there are still important gaps, which credit unions must address quickly, in risk management, controls, systems and governance. All our requirements are proportionate to the nature, scale and complexity of the sector, and represent the standards needed for credit unions to be in a position to ensure adequate protection your members funds. At the end of the day, that is your – and our – key requirement.
Overall, our objectives are aligned, in striving for safe and strong credit unions that remain an important part of the Irish financial system. At the Registry, our priorities and approach are focused on ensuring that the underlying foundations of the sector, and within individual credit unions, are sufficiently robust and strong to support these objectives.
4. What’s Next:
As I mentioned, your challenge now is to revitalise your business model and find ways of doing business to better serve your members and deliver on their expectations. The pace of change in the financial and technology sectors is relentless. Digitisation of retail financial services has increased the expectations of potential members who expect high quality services, fair prices and multi-channel convenient on-demand access. Their expectations see high street banks, building societies and credit unions elsewhere investing tens of millions in changing their operational models, while non-traditional entrants develop new competing services leveraging off their technological, marketing and cost efficiency advantages.
In our interaction with many credit unions, we see the difficulties of trying to make sense out of a rapidly changing landscape. We regularly refer to the leadership needed to take larger, sector-wide and potentially risky and expensive approaches forward. Or it may be that credit unions may need to work with others, to realise the economies of scale and scope needed to provide the type and quality of services people now expect. International experience provides some guide to how peer credit union sectors approached the objective of how to provide the services, products and supports that credit unions need to successfully provide value to their members. I want to acknowledge that we in the Registry see, across the sector, more commitment to learn from others and embrace broader ideas and visions for the future. But it is very important that future ambitions are grounded in reality regarding how to take them forward, in a risk-managed way, and proportionate to the Irish credit union movement. I would emphasise the importance of credit unions thinking hard about their membership base, and how they want it to evolve over time, as this will give a more solid foundation in these uncertain times, rather than necessarily aim at what others are doing.
Many suggestions have now been put forward for tackling the very serious crisis in social housing, including by the credit union sector. Proposals consider how the sector could use its surplus funds in a more proactive but still community, social and risk-focused way, and those are credible aims.
At the Central Bank it is our statutory duty to ensure the protection by each credit union of the funds of its members and to foster a safer, stronger credit union sector. It is on these criteria that we base our assessment of any proposals put to us, and we are always open to developments that would satisfy these criteria. In our recent regulations, we explicitly added reference to our ability to prescribe further classes of investments which may include investments in “projects of a public nature”. This would of course include, but not be limited to, social housing projects. Regarding specific proposals, an important criterion is always to consider how any funds provided – which are the savings of members – would be protected, in a transparent way.
5. Stakeholder Dialogue and Long Term Lending Limits
Across the sector, we share the common view of the need to grow loan income in credit unions as a requirement for sector viability. While developing new products and services is necessary, it is important that credit unions can grow their income from their traditional lending business first and have appropriate systems and controls in place to assess and mitigate the risks involved.
At the Registry, we are committed to engaging with credit unions on their business model development proposals and on challenging for success. We aim to ensure that credit unions have a clear understanding of what they need to do to develop a viable business model. In our Stakeholder Dialogue process, we have jointly focused on requirements for sectoral sustainability and viability; longer term vision; longer term lending limits and their impact, and developing and publishing sectoral data and analysis by the Central Bank.
Our long term lending limits are often cited to us as an example of a regulatory barrier to business model development in the credit union sector. But, compared to an allowed limit of 10% of gross loans over 10 years (15% subject to additional criteria), only 2.1% of such loans are currently extended beyond 10 years, suggesting a limited risk appetite for this type of lending. Stakeholders counter this fact by stating that the limits framework deters credit unions from undertaking more longer term lending, as the limits make it uneconomic to expand significantly into this business line given the expertise and costs involved. At the Registry, we acknowledge these views and are keen to get a better understanding of the sector’s aims regarding longer term lending including mortgages. Through the Stakeholder Dialogue process, we are advancing analysis and understanding of the issues and impediments in this area. Overall, the key issue is for credit unions to set out a clear path on how they wish to develop, and we will then consider any amendments to the regulations that may be appropriate.
6. Consultation, New Regulations, including €100,000 limit
By its nature the relationship between a Regulator and regulated entities will always have some degree of healthy tension. Regulators consult with the entities they regulate and other stakeholders, and listen to a wide range of views. Sometimes regulated entities may feel their views are not being taken on board. At the Registry we believe in meaningful consultation and we are prepared to make changes where appropriate and I would point to changes undertaken following recent consultations in that regard.
In our consultations, we set out the prudential and policy objectives we are seeking to achieve to support a stronger and healthier sector. The issues raised are typically complex in nature and requiring developed analysis and response. Decisions are taken with a view to addressing the prudential objectives identified, the nature and trajectory of the risks involved and the nature and timeliness of required actions. The true value of consultation is to achieve understanding of our prudential concerns, seek critical challenge of our analysis, and in particular to ensure that there is no unintended impact on business model development. As demonstrated most recently with CP76 (maturity limits for investments), and CP88 (liquidity limits and members savings) we have shown our willingness to act on feedback received and will continue to do so.
In respect of the savings limit in particular, I acknowledge the view of the sector that this limit represented a reputational slight, that credit unions might somehow appear less trusted with large deposits, and could communicate a lack of confidence to members. For our part, we are seeking to address financial stability (impact on member confidence generally if any member were to lose uninsured deposits), liquidity risks and concentration risks. Having considered all the feedback and the substantial challenge, we undertook a period of more detailed reflection and analysis. We have, as you know, kept the limit but adapted to allow applications for retaining and, in special circumstances, accepting new deposits over €100,000. We have now developed a framework and application processes for credit unions. We consulted with the sector and other stakeholders in February and, building on the issues raised and our further internal review of the appropriate approach, we intend to discuss these processes with the sector representative bodies in coming weeks. We will finalise the documentation and guidance for credit unions following this brief consultation.
7. Closing Remarks
In summary, the credit union sector has had a remarkable history, from its pioneering founders achieving their remarkable social and financial objectives, to its rapid growth and coverage across Ireland, then to its difficulties in and after the financial crisis, and its subsequent embracing of restructuring and regulatory changes as the starting point of tackling its structural issues.
These changes include broad-based adoption of transfers; adoption of new regulatory requirements; conservative financial decisions on dividends and provisioning; higher standards of regulatory engagement and higher standards of compliance; focus – by many – on lifting lending restrictions, and increased focus on new business development ideas and proposals.
It is clear that reform of a fundamental nature is required in your sector and I welcome the League and others focusing on possible options for a viable future for your members. That vibrant future depends on tackling your major structural challenges quickly. While the economy is improving, credit unions cannot depend on this alone to ensure their future.
The development of the sector, from its origins to its height when it provided financial services to a large portion of the Irish population and supported social and community objectives, all within a volunteer-led movement, provides an excellent example of what can be achieved with vision, commitment and leadership. Adapting the vision of those early pioneers of the movement, for the world we live in today and for the current realities of the sector, is the challenge faced by credit unions’ managers, boards, volunteers, members and representative bodies. I think those pioneers would embrace that challenge wholeheartedly, and I am confident that the sector, with the impetus already underway from embracing many challenges, from striving to meet regulatory requirements and from efforts to stabilise the sector, has the commitment and capability to do the same.