By The Public Banking Forum Ireland
These are challenging times for the 350 plus credit unions operating throughout the Republic of Ireland. Having proven more prudent, robust and resilient than the commercial banks, the credit unions have none-the-less suffered a devastating cumulative impact from Ireland’s banking collapse, the impact spread over several years. Whilst the failure of the banking system and the collapse of the debt-fuelled property bubble were sudden and dramatic events the contagion or knock-on effects of the crisis on other parts of the financial system and of the economy have been deep and prolonged. The Irish Government and the troika bail-out partners moved quickly to rescue the too-big-to-fail banks and to nationalise and arguably socialise their losses. One consequence of those measures has been to leave the (non-financial) corporate, household and public sectors saddled with a mountain of debt.
In Ireland the seven years since the 2008 crash have seen a steep rise in unemployment, a collapse in household wealth as asset values plummeted and a sharp decline in investment. Some 530,000 Irish people emigrated since 2008 and the number of immigrants has been significantly lower. Seven years after the collapse pundits now claim evidence is emerging of a balanced recovery beginning to lift the domestic economy. While Central Bank forecasts are positive and property prices are rising there is paltry evidence of real confidence among consumers and businesses. It is no surprise that many are still paying down debt and that personal loan demand remains subdued.
The c.50% fall in total personal loan demand after 2008 and the very low returns obtainable on low-risk investments severely limit the capacity of credit unions to generate income from lending or from their investments. While one key objective of the Government’s ‘Commission on Credit Unions’ was to ‘identify solutions to enable them to evolve and grow in line with their ethos and guiding principles’, the principal outcome in regulatory terms was to perpetuate and reinforce the constraints on credit union lending and investment activities. This limited their scope to generate income at a time when the combined costs of bad debt provisioning, administrative compliance and technology were rising.
Credit Union Regulations; Reinforced and Perpetuated
The business model of credit unions is thus under severe strain in the current exceptional economic environment. Their surplus resources have been depleted by rising costs and diminishing returns over several years. In particular, the 100 smaller credit unions; those with assets of less than €15 million, are under pressure to merge or amalgamate.
The Registrar of Credit Unions, which is responsible for regulating credit unions, is encouraging and facilitating such mergers as a means to secure greater economies of scale. There would appear to be a consensus view among the relevant authorities including the Central Bank and Department of Finance that mergers and consolidation will lead automatically to a more efficient, dynamic and profitable credit union sector. The consolidation of Canada’s credit unions in the 1990’s is sometimes cited as supporting evidence.
While the cost savings and increased scale achievable by merging are to be welcomed it cannot be viewed as a solution which addresses the limitations of the business model. The new larger credit unions may still struggle with inadequate loan demand and derisory returns on investment in the years ahead. The sector may indeed be in a better position to invest, innovate and compete, but can it ever hope to secure the economies of scale enjoyed by the large commercial banks? Nor can it hope to offer the complete range of financial products and services they provide. Moreover, these regulatory constraints and difficult market conditions could result in gradual branch closures, job losses and the loss of skilled staff and local members. The larger merged and consolidated credit unions may still be required to continue to deposit much of their members funds in short term deposit accounts in their competitors, the authorized banks.
Why Ireland Needs Public Banks
Ireland’s banking crisis ranks among the worst and most costly in banking history and yet our credit unions have weathered this ‘perfect storm’ by and large without any external support. This achievement stands in stark contrast to the banks which required recapitalisation by taxpayers at a cost of €64 billion. The Irish media have consistently exaggerated problems in a handful of credit unions, remain unwilling to acknowledge the efficiency of prudent, well managed institutions and would rather, it seems, confine credit unions news to the parish newsletter!
Credit unions have been and remain uniquely supportive of the duopoly which dominates our banking landscape – and not by choice. Investment regulations require the credit unions to deposit surplus member’s funds in their competitors, the ‘authorised banks’ which are designated as ‘pillars’ (despite their ‘sinkhole’ appearance). Second, the said regulations also greatly restrict credit unions from competing on a level playing pitch with the said ‘pillars’. And finally, as taxpayers, credit union members and staff have been compelled to help recapitalise the ‘basket cases’. This is not a recipe for fair competition, prudent behaviour or a balanced financial system. A duopoly competing to finance real estate deals (the bulk of all lending) could well be the formula for guaranteed recidivism.
Credit-fuelled boom and bust in asset markets (mainly property) have wrecked economies on a cyclical basis for decades. Economist Richard Werner (Princes of the Yen, New Paradigm in Macroeconomics, etc) revealed how some economies in Europe and Asia avoided the perils of boom and bust by either; (a): having state or public banks constitute a large (c40%+) part of their financial system, or (b) having (real) central banks which used window guidance to direct credit to the real/ productive sectors as opposed to speculative and non-productive real estate/asset transactions.
The German Sparkassen public savings banks are a fine example of public banks with superior performance, proven resilience and a local and inclusive service ethos. The 430 Sparkassen helped Germany’s SMEs (the ‘mittelstand’), households and the German economy weather the 2008 aftermath by increasing lending despite adverse conditions. Operating under a Public Mandate enshrined in law, and under municipal trusteeship (in effect without owners), the Sparkassen are mandated to lend only within their region, to lend to enhance inclusion and to advance their region’s competitiveness and to shun all types of speculation. Their exemplary record testifies to the robustness and superiority of this model of banking institution.
To safeguard Irish taxpayers, to protect Ireland’s economy and address the needs of all our citizens and productive enterprises and our regions Ireland needs new banking institutions. We need strong local credit unions, public banks and post offices co-operating to serve local needs and extending credit for households, productive small enterprises and agriculture. We need an effective counterbalance to the profit-maximising, too-big-to-fail banks competing to finance major asset purchases and speculation.
Good News for Ireland’s Credit Unions and rural Post Offices
The good news for Ireland’s credit unions and rural post offices is that for almost a year now the Public Banking Forum of Ireland (PBFI) has been working with the German Sparkassen Foundation for International Co-operation (SBFIC) who are actively seeking to share their time-proven business model and public banking expertise with Irish partners, to establish, in partnership with credit unions and others, a system of regional public banks with a central service provider. Dr. Jürgen Engel and colleagues from the SBFIC have visited Ireland several times in 2014 and in recent weeks presented a ‘Concept Paper’ to the Minister for Finance Michael Noonan and officials of that Department. The initial response was said to be favourable.
The good news is that with pro-active leadership by the ILCU and CUSOP the Irish credit union movement is addressing the challenges facing credit unions. CUSOP is developing the technological capacity of credit unions to better serve the banking needs of members. The ILCU Policy Platform 2015-2016 includes initiatives to establish state-backed funds for SMEs and Social Housing and proposals for a CU central facility for home loans. Together, credit unions continue to serve members needs and those of their community and the wider economy.
The on-going closure of some local post offices is a worrisome trend for communities and local businesses. Credit Unions are reportedly helping limit the loss by collaborating with local postmasters (as in Limerick) or with An Post to ensure continuity of services in the locality. Co-operation and collaboration clearly yield solutions.
The good news is that many credit unions, the ILCU, CUSOP and others have identified solutions to enable credit unions to evolve and develop in line with their ethos and guiding principles. And credit unions are implementing those solutions and continuing to provide efficient services locally having weathered the perfect storm. That’s a tribute to their founders, to the loyalty and trust of members and our dedicated staff.
Some still expect the fabled ‘third pillar’ of Ireland’s financial system to be a new market entrant. They might soon discover that the third pillar is where it always has been, at local level providing a full range of financial services to their members and stakeholders. The really robust ‘pillar’ of Ireland’s financial system is its credit unions and their 3 million taxpayer members. The fabled ‘third pillar’ could well be our own dedicated credit union bank and central service provider if that’s what we as credit unions want!
Joseph Glynn M.Sc., (Harold’s Cross Credit Union), firstname.lastname@example.org
In Germany a Sparkassen Public Savings Bank and a Cooperative Bank operate from the same building; they even use the same entrance door.
In Ireland, this could be your local Credit Union & your local Credit Union Bank.
Thank you for your time,