A STATUTORY stabilisation support scheme for credit unions has been proposed by the Central Bank as a possible means of addressing the increased financial pressures being experienced by the sector.
In a consultation paper issued yesterday, the Central Bank questioned the adequacy of the current savings protection scheme, operated on a discretionary basis by the Irish League of Credit unions.
The savings protection scheme is designed to provide financial assistance to member credit unions in difficulty and to protect individual members’ savings in the event of a credit union failing.
However, the current fund stands at about €119 million, which is less than 1 per cent of the total assets in the sector.
“We doubt whether the current arrangements would be able to cope with a widespread problem, or indeed a series of individual problems over a sustained period of time, in the sector,” the Central Bank said.
The fact that the savings protection scheme is not open to all credit unions is also problematic. Members of the Credit Union Development Association do not contribute to it, for instance.
Furthermore, in September 2008, the State deposit guarantee scheme was extended to cover the savings of credit union members up to a maximum of €100,000.
As a result, the savings scheme’s role as a potential compensation mechanism for credit union savers seemed “no longer relevant”.
The Central Bank said it favoured an external solvency support mechanism that would provide short-term support to credit unions in financial difficulty. It has proposed a number of models, including various statutory and voluntary schemes.
If a statutory stabilisation approach was adopted, then the Irish League of Credit unions might wish to wind up its current savings protection scheme, it said, and transfer the assets from it to the statutory scheme.
The Central Bank acknowledged that the provision of stabilisation support could create a moral hazard, as there was a risk that credit unions might behave less responsibly if a “bailout” mechanism was available. Therefore the provision of solvency support would have to be considered on a case-by-case basis.
“There would need to be a clear process in place setting out the conditions for provision of support which would apply, including appropriate disciplinary processes for boards and management of credit unions having to seek formal support,” it said.
