Capital requirements on Irish credit unions are “excessive and unjustified” relative to the risk profile of the Irish credit union balance sheet, international credit union requirements and the requirements on competing financial institutions.

That’s according to a research paper compiled by the Credit Union CEO Forum, which has said that this leads to an urgent need to address capital requirements, given strong asset growth.

The research outlines that this growth is not translating into higher risk loan assets.

Instead, funds are being invested in low-risk investments and from a risk perspective, balance sheet profiles are less risky now than in [2009] when the 10% capital ratio requirement was first introduced, according to the forum.

Irish credit unions

The research paper states that the Irish credit union sector is wholly reliant on retained surpluses to accumulate capital.

They do not have access to capital markets or to alternative sources of capital. Capital is derived linearly, requiring a minimum of 10% capital on assets.

The forum states: “The balance sheet of Irish credit unions is not considered complex. Funding comes from members savings and retained earnings.”

The working group explored capital requirements internationally. The group found that credit unions elsewhere are required to hold a capital ratio of between 3% and 6% of capital to assets, despite having far higher loan to asset ratios.

The research paper considers two alternative approaches and recommends that consideration be given to the introduction of capital requirements linked to the underlying asset class.

The forum said that this approach would enable them to serve the financial needs of their members better while continuing to protect member savings.

Fairer field

The forum added that the application of capital requirements that better recognise the risk inherent in a credit union’s asset mix, will provide the opportunity for Irish credit unions to compete on a fairer footing with the increasingly small pool of competition in the Irish market.

Credit unions in Ireland are required to maintain a minimum regulatory capital ratio of 10% plus an operational risk capital requirement.

The minimum regulatory capital ratio was introduced for the first time in 2009, during a crisis period, when the Irish economy was coming under significant pressure.

The forum said that that period of crisis is now long past and the requirements for Irish credit unions need to change accordingly.

House loan/mortgage assetsCapital requirement
European bank mortgages2.1%
Irish bank mortgages5.7%
Irish credit union house loan requirementsMinimum 10%
Credit unions (extended house loan limits – CU total assets €75-100m)Minimum 12.5%*
House lending capital requirements Source: Credit Union CEO Forum *The increased capital requirement of 12.5% applies to the credit union’s total assets and not on specific house loan assets

The CEO forum argues for credit unions to be allowed to provide their services on a level playing field.

“Current capital requirements are effectively making the sector commercially and practically unsustainable,” the forum concluded.