Government on Track to Recover €29.5 Billion Investment in Irish Banks
As the Irish government sets its sights on selling its remaining shares in Allied Irish Banks (AIB) in the coming months, it appears on track to recover the €29.5 billion it invested during the 2008 financial crisis to rescue the country’s major banks.
A€2 billion surplus recouped from Bank of Ireland currently offsets paper losses across AIB and PTSB, based on recent trading levels of the government’s remaining shares.
Credit Unions: A Different Success Story
In contrast to banks, credit unions have experienced a surprising resilience. Initially feared to need as much as €1 billion in taxpayer support in 2011, the sector ultimately required just €250 million, of which €240 million was returned by 2018. Despite operating primarily with unsecured personal loans, credit unions have managed to significantly reduce loan repayment arrears.
Average loan repayment arrears across credit unions of over nine weeks have declined from a peak of 20% of the total loan value in 2013 to just 2.7% by mid-2024. This improvement is notable given the challenges faced by banks, where mortgage arrears of at least 12 weeks peaked at 20% in 2013.
The Credit Union Lending Challenge
While credit unions have demonstrated strong financial health, they have long struggled with lending capacity. Member loans across the sector rose by more than 50% to €6.9 billion in the seven years leading to last June. However, this level only represents 32% of total assets, well below the optimal 50% threshold.
To address this, recent legislative changes aim to boost lending capacity. Laws introduced in 2023 allow credit unions to refer members to peer credit unions for services, facilitate collective lending, and introduce corporate credit unions to support collaboration.
In December, the Central Bank proposed trebling the sector’s capacity for mortgage and business lending to €8.6 billion. The proposals would permit credit unions to lend up to 30% of their total assets in home mortgages and 10% in business loans, without size restrictions.
Allowing credit unions to adopt models similar to banks could facilitate growth but remains a significant challenge.
Liquidity and Capital Constraints
Despite the proposed changes, significant regulatory barriers remain. Credit unions must hold substantial liquidity reserves—up to 30% of assets if more than 29% of the loan portfolio matures in five years—and meet strict capital reserve requirements of 10% across all assets.
These rules, while essential for stability, can hinder lending. Unlike banks, credit unions face higher discounts on government bonds and stricter capital reserve requirements, making it difficult to match the liquidity and capital flexibility of banks.
A compromise on liquidity and capital rules could be the key to unlocking credit unions’ full potential.
Future Prospects and Reforms
The current government has committed to drafting a five-year strategy for the credit union sector to leverage new opportunities. This strategy must outline a clear vision and work to convince regulators to revisit the demanding liquidity and capital rules.
With 3.6 million members on the island, the credit union movement has a significant role to play in Ireland’s financial landscape. By overcoming existing challenges and embracing regulatory reforms, credit unions can achieve sustainable growth and financial inclusion.
Conclusion
The recovery of the Irish government’s investment in banks is a positive development, reflecting improved financial health. Simultaneously, credit unions demonstrate resilience and efficiency, despite regulatory hurdles. With the right reforms, the credit union sector could thrive, offering increased lending capacity and financial stability for Irish consumers.
To ensure the success and sustainability of both banks and credit unions, policymakers must continue to provide support and regulatory flexibility.
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