Dáil Éireann Debate, Thursday - 16 July 2020
26. Deputy Pa Daly asked the Minister for Finance his views on the crisis many credit unions are facing in terms of increased regulation, levy charges, large restrictions on lending and onerous capital requirements; his plans for new legislation governing the sector; and if he will make a statement on the matter. [16245/20]
Amharc ar fhreagraThe Government 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 credit to support the recovery.
Policy Review
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 Credit Union Advisory Committee would report to me on challenges and opportunities for the sector, incorporating implications of COVID-19, and any relevant recommendations. I understand that this report is complete and will be submitted to me in the coming days.
There are several commitments in Programme for Government which relate to credit unions, which will be expanded upon in the coming weeks and months by the new Government, taking into account work already completed such as the CUAC report noted above and a separate CUAC report on directors which was finalised in February 2020. I will also take into consideration the views of key stakeholders.
Levies & Charges
The sector pays four material levies and charges. Three of these levies – Deposit Guarantee Scheme, Resolution and Stabilisation – are used to build up funds, that are available to protect members savings. The fourth levy is an Industry Funding Levy set by the Central Bank to offset the cost of regulation.
Industry Funding Levy
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% of credit union costs on a phased basis, starting with a 20% recovery rate for the 2019 levy (levied 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% 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.
Resolution & Stabilisation Levy
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 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.
Both the Resolution and Stabilisation levies for 2021 will be reviewed by me in advance of completion of the statutory instruments this autumn.
Lending
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.
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.
Following a review and public consultation, the Central Bank issued revised regulations setting out new lending measures for credit unions which came into effect on 1 January 2020. These regulations removed the previous lending maturity limits which capped the percentage of credit union lending which could be outstanding for periods of greater than 5 and 10 years. The maturity limits have been replaced by new concentration limits, on a tiered basis, for house and business loans, expressed as a percentage of total assets. These changes have increased the ability of individual credit unions to manage the composition of their loan books and provide those credit unions with the financial strength, the competence and the capability, the flexibility to undertake increased longer term lending, including home mortgage and business lending.
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.
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, a level which was set following the last financial crisis. Credit unions had average reserves of 16% as at December 2019.
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.
However, the Central Bank also informs me that introducing a risk weighted approach could place a disproportionate burden on individual credit unions involving a requirement for system enhancements to calculate the required detail and a level of new/additional expertise with associated cost implications.
