There's an interesting converstation developing over on politics.ie about the exposure of Credit Unions in Ireland to risk in the midst of the ongoing credit crunch.
I'm developing a small interest in corporate governance questions surrounding Irish Credit Unions, but I really don't know enough to verify anything that's being said in the politics.ie thread. Still, I'm not entirely a pessimist.
At a guess you'd probably be initially inclined to think that credit unions would not be as sophisticated as banks at filtering for risk. I imagine that that thought has probably gone the same way as America's subprime market (which is to say, while risk assessments in credit unions may or may not be particularly great, they are certainly not great in a number of banks, though perhaps for different reasons).
Second, I'd guess that CUs tend to have larger numbers of people from lower-income groups on their books, and are therefore slightly more exposed to risk than retail banks. If so, that may not look like good news. But there's risk and there's risk
The Irish banking sector is sure to be exposed to subprime in the same way that Northern Rock was: some of them are heavily dependent on the wholesale credit market (as opposed to funding mortgages from their own customers' deposits). And lord knows what may happen when repossessions increase in line with interest rates and property price declines.
In this context, given that CUs are more narrowly focused on a (hopefully) more robust version of the subprime market (as in, they haven't been playing the risk fire-sale game) and given that they lack other forms of exposure, they may ironically be in a more secure position than the commercial banks. Not that that would stop a run on the community banks...
Update: As we're beginning to discover, nobody involved in the credit markets will get away scot free.
Poor quality governance,
Poor quality governance, operational competencies, risk management and general know how are at the core of problems besetting credit unions. A growing number of people are quite concerned that despite all the talk of reform and modernisation very little is actually happening. Credit unions have so far demonstrated they are collectively incapable of changing the ways they do things.
The average loan to total asset ratio is now 46% and still heading south. Many are much lower and too few are above 50%. This means that their core operating income (loan interest) is insufficient to cover the costs of their core operations (lending and deposits)consequently there may be a sudden and dramatic decline in profitability and sustainability. Allied to profitability concerns are concerns over the scale of investment losses, loan delinquencies, innappropriate provisions, and write offs. See here for some views and background.
These are some of the problems consistently highlighted by informed observers,the regulator, accountants and the media.
One of the problems in assessing the overall risk scenario is the almost complete lack of publicly available information as almost all credit unions fail to publish their annual accounts online and both the regulator and trade bodies do not publish league tables or perforamance statistics etc.
In short billions of middle class savers funds are exposed within a business model that is arguably crumbling from within. Whilst we can see the cracks appearing we cannot see the structural faults causing them.
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