FINANCIAL REGULATOR'S REPORT:ONE IN five credit unions in the country has fallen below the levels set by the Financial Regulator for capital reserves to protect them against rising loan losses.

At the launch of the regulator’s 2008 annual report, Brendan Logue, the registrar of credit unions, said that 80 of the country’s 418 credit unions had fallen below the regulatory minimum of 10 per cent of assets, while fewer than 10 credit unions had dropped below a ratio of 7.5 per cent.

Mr Logue said that these credit unions will have three years to increase their capital ratios back above the minimum level.

Bad debts on credit union loan books were increasing, he said, but declined to say what percentage of the €7 billion in loans across the sector were in arrears or how quickly those arrears were rising. “It is going to kick in and we will be keeping a close eye on the arrears at the end of the year,” he said, adding that credit unions will not examine bad loans until then.

“The area of most concern is business lending and property finance,” he said, adding that only “a relatively marginal section of loans” were to these sectors.

Mr Logue said that the highest business or property loan was €2 million but that this would only be “a very rare circumstance”.

“There are stresses there,” he said. “This is going to be a very tough year for credit unions. Some won’t be able to pay dividends.”

The registrar is in talks with the Department of Finance on creating a fund of €200 million to €300 million to provide liquidity to credit unions in difficulty.

Jim Farrell, chairman of the Financial Regulator, admitted that the measures taken by the regulator to curb excessive lending, such as setting aside higher levels of capital for speculative development lending and 100 per cent mortgages, were “not sufficient”.

“In hindsight, the actions we took were not sufficient and were not taken early enough,” he said.

“We placed too much reliance on the boards of management of credit institutions as part of the principles-based regulation.”

Mr Farrell said the regulator has now adopted “a more intensive and intrusive” approach. He criticised the banks for mispricing risk and the “far from satisfactory” way they allocated capital, saying they “failed to understand the environment in which they operate”.

“We regulate and oversee what they do but in the first instance they have to take a completely new approach to the way they manage and they have to be held accountable when they breach the trust placed in them,” he said.

Con Horan, the regulator’s prudential director, said there were four staff from the regulator in each institution and that the regulator’s focus was on quizzing the lenders on whether they were correctly identifying bad loans and providing adequately for them.

He said the regulator has been checking with the institutions to ensure they are “challenging their own analysis of the situation to ensure that they are ultimately leading to the proper provisions”.

“That requires very detailed analysis with a large number of people coming at it from an independent perspective and tearing that apart,” said Mr Horan who will take charge of risk and enforcement within the new Central Bank Commission.

The acting chief executive of the regulator, Mary O’Dea, said that public sector pay restraints would not stop the recruitment of the right staff to the commission.