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Thread: Credit Union Sector to be bailed out?

  1. #1

    Default Credit Union Sector to be bailed out?

    Throughout Ireland people are concerned their local credit union is in a spot of trouble. With over 200 credit unions probably unable to pay a dividend (interest) to savers this year many are facing what could become a run on savings as the penny drops on what has being going on. The “volunteer” directors of Ireland’s people’s banks lost the run of themselves, forgot how to lend money and blew a €500m hole in their risky investment portfolios. The number keeps getting larger as losses refuse to go away no matter how much some massage their accounts.

    The crisis is so big it’s taken the wind out of the Irish League of Credit Unions (known as the League) who recently proclaimed credit unions being twice as safe as banks! Oops bit of a slip up there! Then again it once talked up its tiny bail out fund as offering a “discretionary guarantee” should a credit union fail calling a government guarantee a “death fund”. Mind you the League has been well fingered for leading the charge in promoting the risky investment strategy that led to the losses.

    Well it seems Irelands bunch of “enthusiastic amateurs” (regulatory expression- not mine) are thumping the table demanding to be allowed to dip into their capital reserves to fund dividend payments and are demanding a NAMA type solution to sort out their investment losses.

    Thing is at €500m of an investment book of €7bn, credit union losses approach Anglo’s proportions in relative scale before their bad loans are factored in. And to make matters worse you can’t add one credit union balance sheet to another. One credit unions large losses, cannot be offset another’s lower losses.

    To boot while they appear awash with cash as less than €5 in every €10 of €11.5bn in household savings lent out they are also illiquid. Yup they are invested in stuff they cannot back out of without losing more money. The regulator has told many, including some quite large operators, to cut back on lending.

    What’s to be done? Seems as if a bail out scheme will have to be cooked up before credit union’s annual round of AGM’s kicks off later this year or else all hell will break lose.

    As people wise up to the fact a credit union can only pay interest to savers from profits made and “no profits = no interest/dividend” many are beginning to move their money elsewhere.

    Others are asking their credit union if it will be able to pay a dividend this year and if not why not?

    Just how much the bailout will cost is anyone’s guess as no one is providing a scintilla of data save to say that “some” are in trouble etc…

  2. #2
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    credit unions, like any dividend paying institution, have to cut their cloth according to its measure, it isn't like skipping a bond debt payment.

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    about six years ago, I was planning to buy my first home but didn't have the deposit, the norm was to borrow from the credit union and use as a deposit. I wasnt a member so I opened an account in the union where my family were, I opened it with a tenner. I then asked them for a loan of 20k, they said they would only loan 5 times my deposit.

    I borrowed 5k from my sister, put in the union, borrowed 25k , gave my sister back her 5k and had my deposit.

    What a great business structure.

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    Politics.ie Member ArtyQueing's Avatar
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    I do not know how you managed that - our credit union will not let you withdraw money if it means you have a loan larger than your savings
    "You Popish rogue" 'ní leomhaid a labhairt sinn
    acht "Cromwellian dog" is focal faire againn
    nó "cia súd thall" go eann gan eagla
    "Mise Tadhg" géadh teinn an t-agallamh

    Bodaigh an Cháise táid go hatuireach
    ag filleadh ar a gcéird gach spéice smeartha aca
    gan ghunna, gan chloidheamh gan pinnse chleachtadar
    d'imthigh a mbrígh is tá an cridhe dá ghreada aca.

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    Politics.ie Member White Horse's Avatar
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    Most credit unions I know have an abundance of deposits and very low levels of loans.

  6. #6

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    Great business structure? Paying interest on 25k for access to 20k? Problem is 2/3rds of all first timers did the same thing at peak boom prices on a zreo questions asked basis - and the League of Credit Unions had the audacity to suggest credit unions were not exposed to property bubble lending. Add defaulting downpayment borrowers to investment losses and you are getting a picture of just how great the business structure is.

    @MortgageBroker
    Not quite the same thing equating a credit union dividend to a joint stock company dividend although the concept is similar. Not the same as a bond defualt either. It's more like a bank declaring it cannot pay interest on retail deposits as its losing too much money. Now what would happen to that bank?

  7. #7
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    The argument for the bank bailout, is that it will help stimulate business. Credit Unions dont do this.

    I am of course oppose to the bank bailout. Just giving you there reason.

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    Politics.ie Member luckyfrank's Avatar
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    Im some savings in the credit union this is news to me

    Im concerned are you saying that the credit union could go belly up like anglo ???????

  9. #9
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    Quote Originally Posted by luckyfrank View Post
    Im some savings in the credit union this is news to me

    Im concerned are you saying that the credit union could go belly up like anglo ???????
    my local credit union is running radio ads offering unsecured loans ,no saveings neccessery ,will they ever learn? they were badly burnt recently by non nationals doing a runner.

  10. #10

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    In March this year 115 credit unions were reported to be operating at a loss and unlikely to trade into profit for the year.

    Later in the year this figure approached 200. There are c415 credit unions operating with assets ranging €5m (tiny) to €300m (large).

    The concentration of household savings is acute as savers are drawn from a local population living within c15sq miles of the credit union. Employer credit unions such as the Gardai differ – their “membership” is based on employment.

    The top 100 control 80% of €11.5bn in savings and of these the top 50 control c60% or c€7bn

    Apart from global figures : investment losses €500m, Bad Debts €787m etc. no one knows how these break down at individual credit union level for this year. Savers will have to wait until credit unions produce their accounts after their year end Sept ’09 and hold their AGM’s which can be any time from November next onwards – some AGM’s have been delayed until the following March.

    @lucyfrank
    Anglo hasn’t gone belly up – yet. It would have had the government not pledged its €4bn. No one knows how many credit unions might go belly up or are close to belly up status – called insolvency. Certainly the 200 operating at a loss will have to cover these losses from their reserves and if high enough then they could become insolvent. Many people think that while they are seriously under-lent : having less that €5 in every €10 out in loans that they are awash with cash. They aren’t as the money they could not lend, they invested – which is why they are facing €500m in losses. Much of this money is tied up in long term investments that cannot be converted to cash without triggering losses. So they are illiquid – short of cash and many cannot lend.

    Remember savings are guaranteed up to €100k should a credit union fail – the issue is not the guarantee but how much it will cost the taxpayer to bail out credit unions.

    see here for more: IRISH CREDIT UNIONS VOICES FOR THE FUTURE

    http://www.irishcuvoice.com/2009/06/...-to-reach.html
    Last edited by mountstreet; 30th June 2009 at 12:34 AM.

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