Transformation in the Irish credit union sector
Research has played a key role in shaping a transformation of the Irish credit union sector, guiding the introduction of a strengthened regulatory framework to promote financial stability and offering diversification opportunities for credit unions.
Over the past twenty-five years at Queen's Management School, Donal McKillop has developed a considerable body of empirical research on credit unions in the US, Canada and Ireland, based upon extensive panel datasets.
Work on US credit unions is undertaken with John Goddard, University of Bangor and John Wilson, St Andrews University. Work on Irish and Canadian credit unions is led by McKillop and undertaken with David Glass, University of Ulster; Noel Hyndman, Queen’s Management School; P Goth and Syamarlah Rasaratnam (PhD students of McKillop); and Barry Quinn, Queen’s Management School.
Regulatory change, sectoral consolidation, and business model development have been areas of research focus.
Comparing governance in Irish and Canadian credit unions found that the governance process in Irish credit unions had not accommodated or responded to developments elsewhere in corporate governance. For many Irish credit unions, governance was little more than a regulatory technical and not an instrument for improving board quality.
Research investigated regulatory compliance and found that regulatory guidance, particularly with regard to bad debt, resulted in a deterioration in non-parametric measures of efficiency for a third of all Irish credit unions.
Research investigating the capitalisation of US credit unions before and after the introduction of the capital adequacy regulatory framework in 2000 found that capitalization varied pro-cyclically and, until the financial crisis of 2008, credit unions classified as adequately capitalized or below followed a faster adjustment path than well capitalized credit unions. This pattern was reversed in the aftermath of the crisis.
Sectoral consolidation (mergers)
The comparative research, referred to above, on governance in Irish and Canadian credit unions identified the importance of strategic mergers in the promotion of stability and the generation of member benefits. In contrast, mergers between strong and weak credit unions resulted in a dilution in membership focus, an increase in loan arrears and reduced dividends.
Research on industry structure explored the impact of exit through merger and acquisition (M&A), or through failure and internally generated growth, on the size distribution of credit unions in the US, finding that M&A was the principal cause of the reduction in US credit union numbers, but that its impact on concentration was small. Divergence between the internally generated growth of smaller and larger credit unions was the principal driver of a rise in concentration.
Business model development
Investigating the influence of diversification on business model development found that small credit unions should avoid diversification and continue to operate as simple savings and loan institutions while large credit unions should exploit new opportunities around their core expertise.
McKillop and Quinn examined complexity and diversity in the business model of Irish credit unions, identifying three classes of business models with two of the three classes subject to diseconomies of scale. The analysis concluded that such complexity and diversity could not be accommodated within a one size fits all regulatory framework.
McKillop’s research has played a key role in effecting and shaping a dramatic transformation of the credit union sector in Ireland. The transformation has emanated from recommendations made by the Commission on Credit Unions (CCU), chaired by McKillop, which drew extensively on his research. By June 2016, 48 of the 54 recommendations made by the CCU had been enacted through the Credit Union and Co-operation with Overseas Regulators Act 2012, either by regulation or by other means.
The recommendations, which drew on McKillop’s research, concerned enhanced reserves, liquidity and capital requirements, and other prudential and governance measures. The introduction of the strengthened regulatory framework for credit unions began in August 2013 with the commencement of a bespoke fitness and probity regime for credit unions followed by new governance and prudential requirements in October 2013.
The remaining sections of the 2012 Act, which were commenced in January 2016, provided the Central Bank with the power to make regulations. The 2016 regulations covered reserves, liquidity, lending, investments, savings, and borrowings, building on existing prudential and governance requirements in these areas.
At the launch of these regulations, in January 2016, Anne Marie McKiernan, the Registrar of Credit Unions said:
“The Report of the CCU made a number of recommendations regarding the strengthening of the regulatory framework for credit unions. These regulations mark a further important step in the development of a strengthened regulatory framework for the credit union sector and will contribute to the maintenance of the financial stability of the sector.”
The improved regulatory framework made a positive impact on the sector, as Patrick Casey, then the Registrar of Credit Unions, observed in November 2018:
“We see higher performing credit unions have typically moved beyond a mere ‘tick box’ compliance attitude to exhibit a more rounded governance culture, with the board and management teams demonstrating strong risk awareness and understanding.”
Sectoral consolidation (mergers)
One of the key recommendations made by the CCU was the establishment of a credit union restructuring board. In response to this recommendation, the Irish government established the Credit Union Restructuring Board (ReBo) in January 2013. Restructuring was a way of addressing weaknesses in the sector and a business strategy for credit unions that wanted to achieve the scale necessary to move to a more sophisticated business model.
McKillop’s research on the importance of strategic mergers to yield scale and scope economies helped influence the types of mergers encouraged and supported by ReBo. When ReBo ceased its restructuring operations on 31 March 2017, it had supported 82 mergers involving 156 credit unions with total assets in excess of €6.7bn (approximately 50% of the total assets of the sector).
As Bobby McVeigh, the Chair of ReBo, noted in July 2017:
“Positive outcomes have been evidenced in the credit union sector’s financial stability as a result of the mergers enacted, and perhaps just as importantly, a marked positive difference in the credit union attitude toward restructuring has been effected throughout the sector.”
At the launch of the Central Bank’s thematic review of restructuring, in February 2019, the Registrar of Credit Unions, Patrick Casey, observed:
“Since 2013 restructuring has transformed the sector, as credit unions transferred to become part of larger, stronger credit unions, with multiple business locations. Today’s report highlights that credit unions that have completed transfers are delivering higher lending growth and improved cost to income metrics compared to peers.”
Business model development
CCU stated that business model choice could vary from a simple savings and loan model to a more complex and broader product mix model. However, greater complexity necessitates more stringent regulatory requirements. McKillop’s research has helped inform business model choice by highlighting that diversification may be detrimental for small credit unions and, although large credit unions are better placed to exploit new opportunities, diversification should be tied to core product areas.
To support business model development, the Central Bank in 2019 issued new lending measures which enabled larger and better capitalised credit unions to engage in longer term lending including home mortgage and business lending.
Introducing the changes in November 2019, the Registrar of Credit Unions, Patrick Casey said:
“The amending regulations represent significant and fundamental structural framework changes, providing sufficient capacity and flexibility to enable safe and sound business model transformation on a sustainable basis serving members’ long term interests.”
In September 2018, the Central Bank facilitated the establishment of a CEO led Business Model Forum (chaired by McKillop) to identify change enablers that would facilitate business model development. The work of the CEO Forum in the intervening period has been outcomes-focused and has delivered product solutions, a collaborative model, and intermediated services.
REF 2021 case study