Ireland’s mini-banks are edging close to meltdown as nearly half of our 405 Credit Unions won’t be in a position to pay savers interest on deposits this year. Most of the deposits in Credit Unions amounting to over €11.5 billion are covered by the Government guarantee but will this be enough to stem a run? Consider what would happen if any of the main banks announced today that it could not afford to pay interest, a position likely to last several years! Eighty percent of Credit Union deposits are free to move and are not linked to loans.

Long term lack of reform of a credit union marketplace cocooned by laissez faire regulation, Government lobbying and patchy management skills has exposed hundreds of thousands of savers to conditions worse than the main banks. These stresses will vary from one Credit Union to another with employer-based Credit Unions such as those of the Gardai, Teachers etc, likely to be in better shape than some poorly managed community-based credit unions more exposed to the recession, its mounting bad debts and its investment losses.

The problem isn’t helped by the lack of visibility by some of the most vulnerable Credit Unions due to bizarre accounting policies and the failure to fully recognise investment losses in 2008. Most Credit Union savers are unlikely to hear about the instability of their Credit Union until they sit down at AGMs later this year. It will come as a complete shock.

Predictably the Regulator will be blamed for enforcing a rule which requires Credit Unions to maintain capital buffers at 10% of assets to prevent instability and default. Credit Unions have been instructed that failure to do so will require them to cease trading. Some Credit Unions have engaged in the ultra high risk tactic of paying dividends out of these reserves and have been caught by the Regulator’s new found vigour in enforcing the rules. These Credit Unions simply don’t have the capital. They’re also unable to pay dividends and join at least 180 Credit Unions unable to do so.

The political significance of a run on Ireland’s vital credit union network will not be lost on the Government. Unlike big banks Credit Unions are highly concentrated. That means a bust isn’t dispersed throughout the economy but narrowed to a local community and small savers. For example one commuter town Credit Union that has savings of nearly €200million concentrated within a ten mile radius has already been told by the regulator to curtail its lending. It is one of the top 50 credit unions controlling 60% of the €11.5 billion in savings. A default in any of these could be catastrophic.

The Government needs to set about rapid mergers in the Credit Union marketplace, likely resulting in 50 or so much larger organisations. The strongest need to take over the weakest.

Just like the banks it needs to begin with a detailed arms length audit of each Credit Union using rigorous accounting standards. The desperate shortage of cash in the market needs to be tackled by establishing a support bank for Credit Unions to stop them lending to each other and exposing the virus of default ever wider. Just about the most reckless thing Minister for Finance Brian Lenihan could do is to cave into intense political lobbying by the weakest to loosen regulation. It would be like passing hamburgers around a cardiac unit.

Tip: Ask your Credit Union if it will be able to pay dividends or interest this year. Get it in writing from the Board.