Dáil Éireann Debate, Tuesday - 28 February 2017
38. Deputy Michael McGrath asked the Minister for Finance his views on the possibility of larger credit unions becoming involved in mortgage lending in a significant way; if his attention has been drawn to the fact that the current restrictions on long term lending are preventing this; and if he will make a statement on the matter. [10410/17]
Amharc ar fhreagraThis question relates to the future of credit unions, in particular the views of the Minister on whether larger credit unions should be given the opportunity to enter the mortgage market in a significant way and provide much-needed competition for our banking sector in the provision of residential mortgages.
My role as Minister for Finance is to ensure that the legal framework for credit unions is appropriate for the effective operation and supervision of credit unions. The Registrar of Credit Unions at the Central Bank is the independent regulator for credit unions. Within her independent regulatory discretion, the registrar acts to support the prudential soundness of individual credit unions, to maintain sector stability and to protect members' savings.
Credit unions can provide mortgages to members, within certain maturity limits contained in the Credit Union Act 1997 (Regulatory Requirements) Regulations 2016, known as the regulations. The regulations set out the percentage of a credit union's loan book that can be outstanding for periods exceeding five and ten years, as well as limits on the maximum outstanding liability to an individual member.
Under the regulations issued by the Central Bank in January 2016, credit unions continue to be allowed to lend up to 30% of their loan book over five years and up to 10% over ten years, subject to a maximum maturity of 25 years. In addition, credit unions are able to apply to the Central Bank for an extension to their longer-term lending limits of up to 40% of their loan book over five years and up to 15% of their loan book over ten years. Approval is subject to conditions set by the Central Bank. There are 11 credit unions approved to avail of increased longer-term lending limits.
The Central Bank informs me that the December 2016 prudential return indicates that, for the sector overall, total gross loans over ten years amount to approximately 2.7% of total loans in the credit union sector compared to the limit of 10%, and 15% in some cases. The Central Bank has indicated that while it can see longer-term lending, including mortgages, as part of a balanced portfolio of total lending, in its analyses credit unions need to consider the impact of longer-term lending on interest margins, return on assets and on balance sheet structure as the issue of funding longer-term lending with short-term funding is a challenge for the credit union business model.
Additional information not given on the floor of the House
The Central Bank further informs me that consumer mortgage lending is an activity that has its own unique risk profile, and proposals to become involved in mortgage lending in a significant way must be supported by an evidence based business case.
The Central Bank has no interest in assisting credit unions in getting into the mortgage market in any significant way. The Minister mentioned an overall figure of 2.7% of the loan book across the sector being out for a period greater than ten years. The figure is somewhat higher for a number of credit unions, but all it would take is a small number of mortgages for each individual credit union to get them over the 10% limit, which would mean that they would then be in breach of the rules. That is the reality. A small number of credit unions have had an increase of 15% in the limit regarding their loan book over a ten year period.
The reality is that for credit unions to get into the mortgage business in a significant way requires investment in underwriting and expertise. A certain amount can be done on a shared basis across the sector, but the current restrictions, which are a matter for the Minister and not just the Central Bank, are preventing them from doing that. We need competition in the mortgage market, and credit unions offer the potential for that.
We should not be under any illusions, however, given the current restrictions of 10% of lending over ten years. It is not possible for credit unions to get involved in the mortgage market in any serious way under the current rules.
The absolute priority for me with regard to the credit union movement is that members' deposits are safe and the risk of lending does not undermine members' deposits. I also believe that as the work of credit unions progresses and they move away from the threat of impairment in many cases to being active in the market again, the possibility of more extensive mortgage lending is not contrary to Government policy.
For example, the recent report of the Credit Union Advisory Committee, CUAC, provides a number of recommendations, one of which is to conduct a full review of lending limits. I have established an implementation group which is currently looking at those recommendations with a view to implementation, as appropriate. The implementation group consists of representatives from the Irish League of Credit Unions, the Credit Union Development Association, the Credit Union Managers' Association, the National Supervisors Forum, the Central Bank and a CUAC member. The implementation group is headed up by a Department official. One area which the implementation group is focusing on is an examination of lending and concentration limits. I look forward to progress reports from it.
I am not against it as a matter of principle. I need assurances that individual credit unions are capable of long-term lending funded by short-term deposits and that the savings of members are always secure.
The Minister will have to go beyond not being against it and instead proactively assist credit unions to become involved in the mortgage market. The business model of credit unions is under very significant pressure. They have very poor investment returns and their loan-to-asset ratio is in the region of 27%. They are feeling the burden of regulation quite severely.
The CUAC report acknowledged that one of the key recommendations of the commission on credit unions for tiered regulation has not been implemented.
There is a one size fits all approach to the regulation of the credit union sector which, in my view, is fundamentally inappropriate. I am glad that the Minister has finally moved to set up an implementation group to deal with the recommendations from the CUAC report. However, when it comes to mortgages, there will have to be a change in policy. Otherwise they will not be able to get into that market in a significant way. There is a number of large progressive credit unions that have dipped their toes in the mortgage market and it has worked well for them, but all it would take for them to go beyond their 10% or 15% limit is a very small number of mortgages. I hope the Minister takes an interest in the issue because we need to ensure that the business model of credit unions is developed and that there is a genuine strategy for the support and development of the sector which is not just focused on regulation.
I do not disagree with the Deputy's policy position in principle, but there is a risk and it must be ensured that it does not affect deposits. Over the past number of years, we can count on the fingers of both hands the number of credit unions that went under. Supposing that the credit union movement was mortgage lending from, say, 2008 on, how would it be fixed now given all the impaired loans that have occurred? How would depositors' savings be secure if there was a high level of impaired loans in the credit unions that was analogous to that in building societies and banks? It is not simple, but as a matter of principle I want the implementation group to advise on it and to see if we can move to a situation where our credit unions are involved in a wider profitable portfolio of activities which would include, if possible, longer term lending such as mortgages.
