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Credit Unions

Dáil Éireann Debate, Tuesday - 14 July 2020

Tuesday, 14 July 2020

Ceisteanna (306)

Michael Healy-Rae

Ceist:

306. Deputy Michael Healy-Rae asked the Minister for Finance if a series of matters will be examined in relation to credit unions (details supplied); and if he will make a statement on the matter. [15391/20]

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Freagraí scríofa

The Government welcomes the important work credit unions are doing to support communities throughout Ireland at this difficult time and recognises the key role that credit unions play in the delivery of financial services in local communities across Ireland, the need for which is heightened at this time. Credit unions account for approximately one third of the consumer credit market and are well positioned to provide access to credit to support the recovery from the current crisis.

The economic outlook arising by virtue of COVID-19, including reduced demand for new lending, has increased the challenges the sector is already facing. As a result it was agreed that the CUAC would report to me on challenges and opportunities for the sector, incorporating implications of COVID-19, the role credit unions could play in the economic recovery and any relevant recommendations. I understand that this report is almost complete and will be submitted to me in the coming days.

There are several commitments in the Programme for Government relating to credit unions, which will be expanded upon in the coming weeks and months as the new Government beds down, taking into account work already completed such as the CUAC report noted above and a separate CUAC report on directors finalised in February 2020.

Since 2004, the amount of the Industry Funding Levy payable by a credit union has been capped at a rate of 0.01% of its total assets as at 30 September of the previous year. The balance of regulatory costs has been funded by the Central Bank in accordance with the provisions of the Central Bank Act, 1942 (as amended). The cost of regulating the credit union sector has increased over recent years with the emergence of the necessity to increase the intensity of supervision of this sector. In 2018, the credit union sector contributed €1.7 million (circa 9% of the total costs incurred in regulating the sector).

During 2019, I approved the Central Bank request to recover 50 per cent of credit union costs on a phased basis, starting with a 20% recovery rate for the 2019 levy, which will be levied on an arrears basis in 2020, moving to 35% in 2020 (levied in 2021) and to 50% in 2021 (levied in 2022).

In response to the Central Bank's request, I also recommended that credit union contributions should not increase beyond the 50% target until: 1) the levy trajectory has reached the planned 50 per cent rate, at which time the impact on the viability of the sector will be better understood; and 2) a public consultation regarding increasing the levy rate for credit unions beyond 50% is undertaken, which would include a regulatory impact assessment of such a change on the sector.

Given that all other financial services sectors are at, or moving towards, 100% recovery, the move towards 50% in respect of credit unions, with further increases at that time being subject to consultation and Ministerial approval, is measured and takes account of the role that credit unions play in Irish society. Exemptions from levies result in a burden on the tax payer through state subvention.

It is also worth noting that the Department of Finance, in collaboration with the Central Bank, held a public consultation in 2019 on potential changes to the Credit Institutions Resolution Fund Levy. Following this review, I announced on 1 October 2019 a reduction in the levy rate which will result in a reduction of €4 million per annum from €9 million in 2019 to €5 million from 2020, or 44% reduction. My Department is also currently carrying out a review of the Stabilisation Levy which will be completed shortly.

In relation to regulatory reserves, adequate reserves (capital) support a credit union’s operations, provide a base for future growth and protect against the risk of unforeseen losses. The minimum regulatory reserve to be maintained by all credit unions under Central Bank regulations is 10% of the assets of the credit union. Credit unions had average reserves of 16% as at December 2019. Given the current reserves position of credit unions, the level of the minimum regulatory reserve requirement does not represent an impediment to growth in credit union lending.

The Central Bank informs me that the current reserve requirement for credit unions is a reflection of a number of factors including: available sources of reserves (retained earnings); the need for individual credit unions to have the capacity to absorb potential losses; and the business model currently operated by credit unions, which is predominantly focused on the provision of short-term personal lending. In setting the minimum regulatory reserve requirement, the Central Bank are mindful of the financial resilience of the sector, members confidence and the protection of members' funds.

The Deputy may be interested to note, however, that one of the “Additional Observations” contained in a 2019 Peer Review Report of the Central Bank’s Performance of its regulatory functions in relation to credit unions - undertaken by the International Credit Union Regulators’ Network (ICURN) - suggests that the Registry of Credit Unions conduct additional stress-testing on regulatory reserves under the existing leverage ratio and risk-weighted reserve approach. The Registry of Credit Unions has advised me that it will consider this suggestion as it plans its work around implementation of the Peer Review Team’s recommendations. The Central Bank informs me that introducing a risk weighted approach could place a disproportionate burden on individual credit unions involving a requirement for system enhancements and a level of new expertise with associated cost impacts for individual credit unions.

Credit unions already have the ability to improve their loan to asset ratio, including through additional consumer lending, mortgage and SME lending, either individually or through collaborative efforts. Following recent revisions to Central Bank lending regulations, the sector currently has capacity to lend an additional €1.1 billion for mortgage and SME lending collectively, with further additional lending capacity available to credit unions which can comply with certain conditions or on approval by the Central Bank. As at end 2019, credit unions had a mortgage and SME loan book of approximately €300 million.

As part of the Government's COVID-19 supports, it is proposed to revise the Credit Guarantee Scheme (CGS). The scheme is a Department of Business, Enterprise & Innovation (DBEI) scheme, operated by the Strategic Banking Corporation of Ireland (SBCI), and is already available for banks, non-banks and credit unions to participate in, subject to certain conditions. Officials from DBEI, SBCI and my Department have been and will be available to discuss the CGS and other State financing supports with banks, non-banks and credit unions.

I and my officials will continue to engage constructively to assist credit unions in delivering new services to their members, including potential involvement in the CGS and Government initiatives in relation to retrofitting.

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