Address by Registrar of Credit Unions, James O’Brien, to the National Supervisors Forum Annual General Meeting 2011,Westport

Introduction

Mister Chairman, ladies and gentlemen, I am delighted to be invited here today to address the 2011 Annual General Meeting of the National Supervisors Forum.

The National Supervisors Forum has grown from strength to strength over the years and the tireless effort of your committee is to be commended in achieving this end. At this event today there are over three hundred attendees which in itself speaks volumes for the commitment of those involved in a supervisory capacity in their credit unions. The National Supervisors Forum can be rightly proud of its achievement in establishing a framework for credit union supervisors to come together, discuss common issues and be supported.

This achievement is, I believe however, only the starting point if the National Supervisors Forum is to develop into an organisation of influence and remain relevant into the future.

We have over the years identified significant deficiencies in how the supervisory committee function operates in credit unions. However despite this we have not seen substantial improvement in the performance of supervisory committees on a sector wide basis. Too often when we uncover major governance issues in credit unions the annual supervisory report to the members in no way reflects the performance of the board.

As you are aware the Commission on Credit Unions has made certain recommendations in its Interim Report, in relation to the operations of the supervisory committee and we support these changes. A major challenge still remains however in how to ensure that the supervisory committee function is ‘fit for purpose’ in the proposed new regulatory framework. We believe that the National Supervisors Forum can have an important role to play in helping to bring about an enhanced and strengthened overall governance framework for the credit union sector.

Challenges in the credit union sector

The credit union sector in Ireland is currently facing significant challenges and will continue to do so over the next few years. Over the past 18 months or so we have carried out a significant level of analysis on the sector. The findings of the Strategic Review, carried out by Grant Thornton, our own stress testing exercise, the 2011 Prudential Capital Assessment Review, the work of the Commission on Credit Unions – and of course our day to day regulatory work - all point to a need for substantial policy intervention if credit unions are to develop and continue to remain viable in the 21st century and beyond.

While we continue to take the day to day regulatory actions we consider necessary to protect members savings, without significant changes in credit union governance culture and sector operating structures we believe that regulatory intervention alone will not in itself be sufficient to ensure the sector’s long term sustainability and development.

Regulatory Strategy

There have been a couple of significant developments in the credit union sector recently; firstly the publication of the ‘Interim Report of the Commission on Credit Unions’; and secondly the Minister for Finance’s statement of financial support for the credit union sector.

In light of these two key developments I want, this morning, to outline the progress we are making on our credit union regulatory strategy.

As you are aware our strategy falls under three main headings:

• Firstly, we aim to resolve weak and non-viable credit unions to prevent contagion and protect the sector;
• Secondly, we aim to develop and implement an appropriate legislative and regulatory framework for credit unions; and thirdly
• We aim to work towards bringing about a longer term restructuring of the sector to ensure its long term sustainability.

We are pleased that, over the past 12 months, we have made substantial progress on the first two of these three strategic objectives.

The publication of the recommendations contained in the Interim Report of the Commission on Credit Unions can be considered a ‘watershed’ in the development of the sector in Ireland. The recommendations contained in the report will, when implemented, improve the regulatory and operational framework for individual credit unions significantly and help to underpin the financial soundness and development of the sector.

We welcome this. We believe it is vital that all of these recommendations are implemented in full, in as short a timeframe as possible - and under the earliest available legislation.

Credit unions should also embrace these recommendations. Those credit unions that are well governed and operate to the highest standards will be best placed to avail of opportunities to grow and develop into the future. The recommendations relating to fitness and probity for directors, supervisors and managers and the establishment of a statutory governance framework for the sector are particularly important in the context of future credit union development.

The Central Bank and Credit Institutions (Resolution) Act 2011 grants the Central Bank new powers to resolve individual credit unions that are failing, or likely to fail. These powers and the funding made available for resolution work are a welcome addition to our regulatory tool-kit. This recognition of the significant challenges facing the credit union sector and the need for policy response is to be welcomed. We continue to be concerned about the adverse financial trends emanating from the sector and have highlighted the need for us to have pre-emptive intervention regulatory powers to help protect the financial stability of individual credit unions and the sector overall.

Sector restructuring

There has however been slower progress on our third strategic objective which is to bring about longer term restructuring of the sector. The Commission on Credit Unions is charged with bringing forward recommendations in this regard as part of its phase 2 work which has now commenced and we will be actively engaged in this process. We believe it is vital that a ‘blueprint’ setting out a clear operational structure which creates a framework in which the credit union sector can develop is drawn up as a matter of priority.

As you are aware, the first credit unions in Ireland were formed in the late 1950s. The numbers grew exponentially in the 1960s and by the end of 1972 there were 354 credit unions registered in the Republic. The numbers continued to grow steadily until the late 1990s and by the year 2000 there were 438 credit unions with 2.2 million reported members and savings of €4.6bn. Today the number of credit unions has fallen to 407 but the amount of savings under management have increased substantially to €12.2bn. The number of reported members has also increased and now stands at 2.9 million.

That savings have grown to such significant levels in credit unions can in some sense be attributed to their success as ‘trusted deposit gatherers’ however this growth has also exposed fundamental weaknesses in the credit union business model – especially in how credit unions are governed and operationally supported.

There is an increasing mismatch between loans and investments on almost all credit unions’ balance sheets. In many cases, poor governance structures, support systems and risk management capabilities allied with a dearth of skilled people on some boards, supervisory committees and in management, has meant that credit unions have been forced to put more of their money into investments rather than loans. This evolution, if not addressed soon could have serious repercussions for the sector’s future.

While the introduction of proper governance structures and skilled personnel under the proposed new regulatory framework may help to partly slow this trend, the timeframe involved to implement these recommendations will be a barrier to allowing the sector develop at pace and to take advantage of current opportunities. The high costs associated with putting appropriate governance structures and risk management systems in place, in addition to attracting skilled and competent people, will be prohibitive to the development of a sector where 407 credit unions remain autonomous and do not have a coherent infrastructure in place to leverage economies of scale in terms of skills, expertise and operations.

The consolidation of the Irish banking sector offers the credit union sector an opportunity to emerge as an important participant in the future financial landscape. However, our in-depth knowledge and analysis of credit unions indicates that a re-shaping of credit union balance sheets and support structures is required to secure the sector’s future.

We are currently embarking on a programme of work which will involve the resolution of weak entities in the system to prevent contagion and protect members’ savings. The new resolution powers will allow us to deal with credit unions in financial difficulty on a case by case basis. These actions will inevitably lead to a certain restructuring of the sector.

We believe that credit unions have an important role to play in the future Irish financial services landscape. It is important therefore that any restructuring is based on the implementation of a properly thought out and defined plan that aims to protect the sector and make it stronger. We also want to avoid a situation whereby larger entities are created without the necessary governance structures and operational support systems in place to take account of the increase in size and risk.

There are many examples internationally to demonstrate how restructuring can be achieved while retaining the credit union strengths. In Australia, the US and Canada restructuring has been on-going for some time and despite the reduction in numbers of credit unions in these countries, membership and assets have increased. Co-operative principles are maintained. The models differ but they all aim to achieve the same corporate goal of serving members and the community in a sustainable way.

At the 2011 Credit Union Regulatory Forum I spoke about the way this restructuring might be achieved in Ireland. The options range from a planned mergers/transfers restructuring programme, a ‘hub and spoke’ model, right through to a fully centralised model. Any restructuring strategy would have at its core the preservation of the local nature of credit unions and the maintenance of local identity and knowledge. In the Commission on Credit Unions we will be arguing for an approach which takes the best of the international examples.

Conclusion

So in conclusion.

We believe that credit unions can continue to play an important future role in the Irish financial sector. However this can only happen if the structural weaknesses in the current credit union business model are addressed as a matter of urgency. The challenge is how to restructure the model so that the sector can develop to service the needs of its members into the future while remaining financially strong.

We believe that the credit union sector operating within a strong regulatory and operational support framework can develop to become a significant player in a much re-shaped financial sector. This will however require an appropriate policy response – and the willingness of the sector stakeholders and its representative bodies - to fully engage and deal with the structural issues that are contributing to the financial decline in an increasing number of credit unions.

While the challenges are not insurmountable, strong leadership is required. The speed at which the sector engages to bring about this structural change will be all important. There is now an opportunity for the National Supervisors Forum to be part of that leadership and help to secure the credit union sector for future generations.

Thank you for your attention. I am happy to answer questions now.