As the Government sets it sights on selling its remaining AIB shares in the coming months, it is on track to recover the €29.5 billion crisis-era rescue of the three surviving banks.
A €2 billion surplus recouped from Bank of Ireland currently offsets paper shortfalls across AIB and PTSB, based on the trading levels of the State’s remaining shares in both.
In another corner of the financial sector, credit unions were estimated by then minister for finance Michael Noonan in 2011 to require as much as €1 billion taxpayer dig-out.
He committed €250 million. However, €240 million of this was returned in 2018 as the scale of losses proved to be much less than feared, even as some players imploded and scores of others merged with rivals to remain viable.
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This is despite the sector – unlike banks – primarily being in the business of unsecured personal loans.
Average loan repayment arrears of more than nine weeks across credit unions have fallen from a peak of 20 per cent of the total value of loans in 2013 to 2.7 per cent by mid-2024.
Bank mortgages – again, we’re talking about loans secured against assets – that were at least 12 weeks behind in repayments peaked at 20 per cent, by value, in 2013, including buy-to-lets.
[ Credit unions’ mortgage and business lending capacity set to treble to €8.6bnOpens in new window ]
But credit unions have long struggled on one crucial front: lending.
While loans out to members across the movement rose by more than 50 per cent to €6.9 billion in the seven years to last June, the total equates to only 32 per cent of total assets. The optimal level for a healthy sector is widely viewed to be about 50 per cent.
We have seen legislative and regulatory moves in recent times to help the wider sector – which has shrunk from a peak of 428 credit unions in 2006 to about 190 today, following a wave of consolidation – become more viable.
The current rules allow large credit unions in some cases to issue mortgages and business loans of as much as 15 per cent of total assets. For the majority, however, the limit is half that
Laws introduced in 2023 allow credit unions to refer members to peers for services for the first time. They also enable them to club together to provide loans. And they introduce the concept of a corporate credit union – a credit union for credit unions – to support collaboration and pool certain resources.
In December, the Central Bank proposed a trebling of the sector’s capacity for mortgage and business lending to €8.6 billion.
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It closed the public consultation period on the proposals on Wednesday. They would allow credit unions, regardless of size, to lend up to the equivalent of 30 per cent of their total assets by way of home mortgages – and as much as 10 per cent in business loans.
The current rules allow large credit unions in some cases to issue mortgages and business loans of as much as 15 per cent of total assets. For the majority, however, the limit is half that.
But onerous liquidity and capital reserves rules remain in force – and continue to handcuff the sector, particularly more progressive players.
Credit unions must hold the equivalent of a minimum of 20 per cent unattached deposits (which aren’t attached to loans) by way of easy-to-sell, or liquid, assets – including cash and bonds. It’s designed to allow them meet an unexpected spike in members demanding their savings back.
[ Credit unions’ expansion in Irish mortgage market is a watershed momentOpens in new window ]
The ratio rises to more than 30 per cent if greater than 29 per cent of a credit union’s loan book matures in more than five years.
Banks, by contrast, must hold enough liquid assets to get through a 30-day period of stress. For sticky retail the deposits – the type typically found in credit unions – an outflow rate of 5 per cent is assumed for the period, rising to 10 per cent for less stable savings.
Not all liquid assets are considered equal. Credit unions must apply a discount of 10 per cent to the market value of government bonds held as liquidity if they are due to mature between three months and a year.
Bonds with a duration of five to 10 years carry a 50 per cent haircut – even though such securities can be sold on the market at any stage.
Allowing credit unions adopt models like the banks’ might be a step too far. Calibrating risk-weighting models is expensive. But there should be a compromise.
“While we very much welcome the proposed new lending framework, the challenges for managing funding and liquidity don’t go away,” according to Helen Carbery, chief executive of the Credit Union Development Association.
On the capital front, credit unions must hold 10 per cent of assets in reserve. It applies across the board, from personal loans or low-risk government bonds.
For banks, assets are given a risk weighting, which can start off at zero for highly rated bonds (a category Irish government debt has returned to in recent times). The risk weighting on Irish mortgages averages close to 30 per cent, albeit a multiple of the European Union average.
“While the planned easing of lending rules is a very positive development, it’s not a panacea. Liquidity and capital issues remain,” says David Malone, chief executive of the Irish League of Credit Unions.
Allowing credit unions adopt models like the banks’ might be a step too far. Calibrating risk-weighting models is expensive. But there should be a compromise.
The new programme for government commits to drafting a five-year strategy for the credit union sector “to ensure they can fully leverage new opportunities”.
The credit union movement, which has 3.6 million members on the island, must use this to set out a clear vision for itself. It might then be able to convince regulators to revisit the onerous liquidity and capital rules.
