Capital requirements are too strict for Irish credit unions, says study

The 10% capital ratio requirement is out of line with the sectors’ risk profile and with regulation overseas, says the report

A new paper from the Credit Union CEO Forum says capital requirements for the sector in Ireland are “excessive and unjustified” and urgently need to be addressed.

Irish credit unions have been set a capital ratio requirement of 10%, which is is excessive, according the Regulatory Capital for Irish Credit Unions: Time for Change? report.

It says the 10% figure is “unjustified relative to the risk profile of the Irish credit union balance sheet, international credit union requirements and the requirements on competing financial institutions”.

This has created “an urgent need to address capital requirements given strong asset growth”, because this growth is not translating into higher risk loan assets, the study adds. Instead funds are being invested in low-risk investments, which means balance sheets are less risky now than in 2009 when the 10% figure was introduced.

Irish credit unions have no access to capital markets and are wholly reliant on retained surpluses to accumulate capital; funding comes from
members savings and retained earnings.

The working group compared capital requirements around the world and found that redit unions elsewhere are required to hold a capital ratio of between 3% and 6% of capital to assets despite having higher loan to asset ratios.

The study also found a significant excess of capital in Irish credit unions as measured under other International capital regimes and Basel III requirements, which supports their view that Irish credit unions are well capitalised.

As an alternative to current regulation – “an unduly conservative outlier” – the report reccommends that capital requirements should be based on the
underlying asset class rather than total assets.

This would allow enable credit unions to serve the financial needs of their members better while continuing to protect member savings, the study argues.

“The new calculation encourages asset allocation decisions towards lower risk classes that do not require the creation of large capital requirements,” it says. “Should a credit union wish to invest in higher-risk asset classes (potentially higher returns), then higher capital requirements apply, allowing credit unions the opportunity.”