ValueWalk reported in November on the closure of Newbridge Credit Union, the Irish institution wound up on the orders of the Central Bank over bad debt concerns. The NCU’s savings and loans were transferred to Permanent TSB Group (OTCMKTS:ILPMY) in November at a cost of €54 million to taxpayers.
Now, affidavits made available to the public when the Central Bank sought the release of court documents related to the case, show that the management team at NCU believe that the Central Bank played a key role in the collapse.
Fingers pointed at the Central Bank
Specifically, Chairman Ben Donnelly said the Central Bank pushed creditworthy borrowers to default by forcing them to repay early. Many borrowers could have repaid their loans in full given more time. He said the problems stem from action taken by the Central Bank back in 2005, when the NCU was ordered to comply with the Credit Union Act of 1997 and impose a strict 20% limit on the proportion of loans with terms longer than five years:
“This entailed procuring the cooperation of members affected to commit to revised terms whereby, for instance, a loan that may be initially repayable over 15 years now had to be paid in one-third of the time.”
This meant that borrowers not able to afford the increase in monthly payments were told they would have to pay back any outstanding debt in a single lump sum when their loans matured after five years.
“While that may have been a realistic solution pre-recession, in hindsight it has had the unintended consequence of placing members under undue pressure now that the impact of the lump sum repayment is maturing in recessionary times,” Donnelly added.
The beginning of the end
Almost 30% of the total loan book was affected by the decision at the end of 2011. 26 of these loans had an average balance of €550,000, something the Central Bank said “was not common in the credit union sector”. Bad debt provisions of €24.6 million had to be made against the €40.3 million involved. Donnelly claimed that the Central Bank had to be partially responsible as the tighter repayments terms it created pushed borrowers in default, creating the need for bad debt provisions.
“The overwhelming sense that counter staff are reporting to us [the directors] and members are also telling us is that even members who are falling into arrears can cope with 80% of what they are expected to repay and that rescheduling their loans from five years to seven to 10 years would enable them to repay in full.”
At a time when the credit unions are about to enter the current account market, the ease with which the Central Bank closed down Newbridge Credit Union is unsettling. The fact is the financial stability laws that brought about NCU’s demise weren’t designed for that type of financial institution. Moreover, as Donnelly points out, part of the credit union’s problems could have come about from a run on deposits caused by the Central Bank taking control of the institution rather than mis-management:
“It was all the more galling to witness at various critical times the selective leaking of information, culminating with the fact of the intended transfer of NCU to Permanent TSB Group (OTCMKTS:ILPMY) becoming widely known in Newbridge before the Board even had an opportunity to meet and consider its response.”
It’s poignant, too, that earlier this month, the Minister for Finance, Mr. Noonan, said that the government has 100 credit unions on a watch list, as it is concerned about arrears and bad debt. The more sceptical might suggest that the government is concerned that credit unions will take business away from the banks if they offer free banking. And if that were the case, the government might see repayments from banks for bailouts dwindling. It will be interesting to see if other credit unions follow in the wake of Newbridge next year.