Opening statement by Ed Sibley, Director of Credit Institutions Supervision & Acting Registrar of Credit Unions at the Joint Oireachtas Committee on Housing, Planning, Community & Local Government

Good morning and thank you for the invitation to appear today to discuss credit union finance for social housing. 

I want to start by acknowledging the important role which credit unions play in Irish society and in the financial system, and the strong voluntary and community ethos of the sector. Both the role and ethos reflect the primary objectives and purpose of credit unions to promote thrift among their members by the accumulation of their savings and the creation of sources of credit for members' mutual benefit at fair and reasonable interest rates¹.

Our statutory mandate is to ensure the protection by each credit union of the funds of its members, and to maintain the financial stability and well-being of credit unions generally. This informs our approach to all aspects of the regulatory framework for credit unions, including the investment and lending frameworks that are the focus of our engagement today.

My opening statement will provide some background information on the current position of the sector and focus on the potential for credit unions to provide funding for social housing. Specifically I will focus on three main areas:

1. The current position of and main challenges facing the credit union sector – which is important in contextualising our approach.
2. Regulatory requirements and current standards.
3. The potential for credit unions to provide finance for social housing through lending or investment.

1. The current position and main challenges facing the credit union sector

 Over the past decade, credit unions have dealt with the effects of the financial crisis, increased competition, major business model challenges, significant restructuring and increased regulation. Coordinated efforts have delivered an unprecedented level of restructuring, resulting in 116 mergers², which have reduced the number of weaker credit unions and reduced risks across the sector as a whole.

Notwithstanding this progress, clearly significant challenges remain. Return on assets for the sector as a whole continues to shrink; cost to income is high; and while loan books are starting to recover, they are growing at a significantly slower rate than the level of growth in unsecured lending across Ireland³. Further work is required to fully embed mergers and deliver the cost savings and efficiencies anticipated in their business cases. This is critical in putting these credit unions in the best position to deal with structural challenges and to leverage increased scale to provide a broader range of products and services to meet members’ needs and expectations.

Investment income, which helped offset declining loan income for a number of years, is falling. Between 2012 and 2016, annual aggregate investment income has fallen from c.€299 million to c.€174 million, at a time when total sector investments have increased from €8bn to €11.4bn. Our analysis highlights that, if current loan, investment income and cost trends continue, an increasing number of credit unions could face serious viability issues in the future – highlighting the urgent need to now address the business model challenges which the sector faces. In recognition of this, we established a new unit in 2016 with a mandate to engage with credit unions on business model changes in order to progress well-developed proposals supported by credible risk-focussed business plans.

2. Regulatory Requirements and current standards

At the Registry, we have prioritised regulation and supervisory changes that improve credit union safety and better position the sector for the future. Strong governance standards are a fundamental requirement to support strong, viable credit unions and are a pre-requisite for credit unions seeking to expand their existing business models.
Regrettably, standards of regulatory compliance are still well below those required to consistently safeguard members’ funds and position credit unions to tackle business model development. We are still seeing an unacceptable number of credit unions failing to display strategic understanding and good governance. In too many cases, we have encountered limited financial skill sets and weak management; poor systems of control; weak risk, compliance and internal audit functioning; and weaknesses in lending practices. Significant further improvement is required.

3. The potential for credit unions to provide finance for social housing through lending or investment

There has been much discussion on the potential for credit unions to provide finance for social housing with attention focusing on the sector’s low loan-to-asset ratio and the resulting level of surplus funds, the majority of which is currently held in accounts in authorised credit institutions and bank bonds. The Central Bank is supportive of credit unions increasing their investment options, including through potentially playing a role in the provision of funding for social housing. We have recently consulted on proposals to facilitate this and are analysing the feedback received.

Nonetheless, it is important that there is realism on the proportion of the sector’s surplus funds that could appropriately be allocated to social housing. This must be informed by the specific characteristics of funding for social housing and appropriate levels of risk for members’ savings. Additionally, the sector’s surplus funds are held across 277 credit unions, and each individual credit union would have to make an independent decision to provide funding for social housing. The manner in which credit unions may fund social housing will also be driven by the existing legislative and regulatory framework applying to credit unions.

The Credit Union Act, 1997 (‘the 1997 Act’) and the Credit Union Act 1997 (Regulatory Requirements) Regulations 2016 (‘2016 Regulations’) set out the services that a credit union may provide to its members. These include savings and loans and a number of additional services.

Common Bond restrictions in the Credit Union Act, 1997, limit the potential for credit unions to provide funding for social housing via lending as credit unions may only provide services to their membership, which is characterised by a common bond. The common bond is based on a pre-existing social connection such as belonging to a particular community, industrial or geographic group. Therefore, in order for a credit union to lend to an Approved Housing Body (AHB), the AHB would have to fall within the credit union’s common bond. The potential impact of the common bond on business model development was a matter raised as part of the Credit Union Advisory Committee’s (CUAC’s) “Review of the Implementation of the Recommendations of the Commission on Credit Unions”⁴. CUAC has recommended that further consideration be given to the common bond. As a result of common bond restrictions, sector-wide approaches to lending for social housing have not come to pass, so focus has turned to investment-based proposals.

While the primary purpose of a credit union is the provision of loans to its members, the regulatory framework also provides for credit unions to invest surplus funds. Under existing regulations, credit unions are permitted to invest in a range of specified investment classes, which includes government securities, bank deposits, bank bonds and collective investment schemes⁵ made up of these instruments. The Central Bank’s ability to make regulations in relation to investments in projects of a public nature is specifically referenced in the regulation making powers provided for under section 43 of the 1997 Act and therefore such investments can be facilitated by regulations, where appropriate.

Additionally, the 2016 Regulations make reference to the fact that the Central Bank may prescribe, in accordance with section 43 of the 1997 Act, further classes of investments for credit unions which may include investments in projects of a public nature. The regulations state that investments in projects of a public nature include, but are not limited to, investments in social housing projects.

In order to ensure that the investment regulations remain appropriate for the credit union sector, the Central Bank undertook to review the investment regulations this year to consider whether it is appropriate and prudent, at this stage, to facilitate investment by credit unions in other classes of investments, including investments in social housing.
The Central Bank published a consultation paper on 11 May setting out the following potential additional investment classes for credit unions:

• Bonds issued by Supranational Entities.
• Corporate Bonds.
• Investments in Tier 3 AHBs⁶.

In relation to investments in AHBs, the consultation paper identifies potential risks and risk mitigants for such investments, and asks for feedback on the appropriateness of credit unions undertaking such investment and the level of such investment that could be undertaken. An important issue highlighted in the consultation paper is the need for credit unions to take account of maturity considerations and the balance sheet impact of undertaking investments in AHBs which, by their nature, are likely to be illiquid and significantly longer-term than existing investments and could result in an increase in the existing maturity mismatch on the credit union’s balance sheet⁷.

Consideration will also need to be given to the interplay between a possible move to longer-term lending and longer maturity investments, which would exacerbate the existing mismatch between the maturity profile of the sector’s funding and assets. If credit unions want to significantly shift the maturity profile of their assets, they will need to consider how they can extend their funding profile, particularly if it requires the longer-term tie-up of funds belonging to ageing members.

The consultation period closed on 28 June and we have received over 70 submissions from a broad range of respondents. The majority of submissions are from individual credit unions, with additional submissions received from representative bodies, AHBs, investment firms and TDs. We welcome this feedback, which is an important input into the policy development process.

We are in the process of examining the submissions. The majority of respondents have commented on the potential for credit unions to invest in AHBs, and they broadly welcome the potential for credit unions to provide funding for social housing. However, the submissions also demonstrate some divergence in views on the level of risk associated with such investments and appropriate levels of exposure for credit unions.

The Central Bank will consider the entirety of the submissions received prior to finalising changes to the investment framework for credit unions and publishing a statutory instrument amending the investment regulations for credit unions.

Finally, with reference to longer-term lending, it is important to note that under the 2016 Regulations, credit unions are already permitted to lend up to 30% of their loan book over five years and up to 10% of their loan book over 10 years – subject to a maximum maturity limit of 25 years. In addition, credit unions can apply to the Central Bank for an extension to their longer-term lending limits, up to 40% over five years and up to 15% over 10 years. Currently for the sector overall, total gross loans over 10 years amount to c.3%⁸ of overall loan books.

In conclusion, by way of background I have set out the current position of the credit union sector and identified a number of challenges the sector faces. I have also provided some background on the regulatory framework for credit union lending and investment, the consultation process on investment in social housing, and our intention to amend the investment regulations later this year.

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¹ Section 6(2)(a) and 6(2)(b) of the Credit Union Act, 1997.

² Since 2012; based on Registry of Credit Union Statistics.

³ Central Bank Money and Banking tables / Central Bank data based on credit union prudential returns, credit union market share of Total Personal Lending Market contracted from 34.9% to 34.2% December 2015/2016.

⁴ http://www.curmis.ie/wp-content/uploads/2016/07/CUAC-Review-of-Implementation-of-the-Recommendations-in-the-Commission-on-Credit-Unions-Report.pdf

⁵ Under the 2016 Regulations ‘collective investment schemes’ means units, interests or shares in open-ended retail collective investment schemes, other than property schemes, authorised by the Central Bank or by a competent authority of another EEA State.

⁶ The Central Bank is of the view that it would be appropriate to limit investment to Tier 3 AHBs only, in recognition of the higher level of oversight that these AHBs are subject to from the Housing Agency Regulator. 

⁷ Section 2.3 Regulatory Impact Analysis on Potential Changes to the Investment Framework for Credit Unions.

⁸ Based on March 2017 Prudential Returns submitted by credit unions to the Central Bank.